Automated Market Maker (AMM) Beginner's Guide
Automated market makers provide digital asset exchange and automated pricing mechanisms for decentralized trading platforms through liquidity pools, pricing formulas, and algorithms. Understanding changes in supply and demand within liquidity pools, price oracles, and arbitrage helps explain how they work at a basic level.
AMM What Is It
Traditional market makers execute buy and sell orders at market prices, providing trading opportunities for the market. Automated market makers (AMM) use protocols and algorithms to replace this role, typically as part of a decentralized trading platform, allowing users to exchange digital assets without intermediaries or third-party custody.
Liquidity Pools and Automated Pricing
AMM The core is the liquidity pool and its pricing formula. The formula adjusts prices based on the relative supplies of the two assets in the pool. For example, when traders continuously use ETH to exchange for DAI, the amount of ETH in the pool increases and DAI decreases, creating an imbalance in the asset ratio, and the algorithm correspondingly changes the exchange price.
External Prices and Arbitrage
AMM can use price oracles to obtain real-time prices from centralized trading platforms and understand external market conditions. When the same digital asset has a price difference between AMM and a centralized platform, traders may buy at a low price and sell at a high price to arbitrage, and such trading may also help narrow the price difference.
Differences from the Order Book Model
AMM automatically calculates prices based on available liquidity in the liquidity pool, and users primarily exchange with the protocol-managed pool. The order book model aggregates quotes independently set by buyers and sellers, completing trades and price discovery through order matching; the two models form prices in different ways.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/automated-market-maker-amm
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