What is the full form of AMM?

The full form of AMM is automated market maker. And the unabbreviated name also tells a lot about how it works. An AMM works like a decentralized exchange powered by smart contracts and a mathematical formula used to determine the assets’ price. Simply, an AMM facilitates automated trading by creating or, rather, making a market with high token-based liquidity.

Uniswap is regarded as the first successful AMM. However, if you simply go by the chronology, Bancor remains the first AMM to be launched, on the Ethereum ecosystem, in 2017. As far as the creators go, Bancor was ideated and launched by a team of devs, with Guy Benartzi and Galia Benartzi leading the endeavor.

How does an AMM work?

Every AMM uses a set mathematical formula that helps determine the value of assets within the AMM’s liquidity pools. Every time a user wants to trade a token on an AMM, they add an asset to the liquidity pool. As it changes the constant, say k, the price of the assets is determined to maintain the balance of the pool. This is where prices on AMMs can vary from the more fixed ones trading on exchanges.

What are the benefits of on-exchange trading?

Even though trading on market makers and decentralized exchanges can be fun and in line with the ethos of decentralization, even on-exchange trading comes with its share of benefits. These include better liquidity at times for the more elusive tokens, a regulated trading mechanism, fewer chances of smart contract hacks, and more. Plus, this kind of trading doesn’t render the market volatile in case some large orders go through.

What does a market maker do in crypto?

In crypto, a market maker is someone who infuses liquidity. A market maker ensures that a specific crypto trading ecosystem is also loaded with buyers and sellers. Also a market maker can also serve as a buyer/seller, depending on the market scenarios and requirements.

What is a virtual AMM?

An AMM that doesn’t actually hold real assets but relies on a mathematical model for determining the price of an asset is termed a virtual AMM. These AMMs are great for trading synthetic assets — ones that mimic real-world entities like gold or silver. Virtual AMMs incorporate virtual balances and create a more balanced pricing model that eliminates slippage considerably. Curve Finance can act as a virtual AMM if required.

What is liquidity pool crypto?

In crypto, a liquidity pool is a smart contract-power reserve where tokens are stored. These pools form the backbone of an AMM, allowing users to trade token pairs based on a set ratio of assets and prices. Liquidity providers fund the liquidity pools. Also, the size of the pool determines the slippage and other factors associated with trades.

An NFT AMM works like any other AMM but specifically for the NFTs. This way, it becomes easier for users to buy NFTs from liquidity pools instead of centralized bodies with middlemen. NFTX is one such example of an NFT AMM, a platform aimed to make NFT trades more accessible to individuals.