What is automated market maker

Automated Market Maker AMM is the fundamental protocol utilized by decentralized exchanges with autonomous trading mechanisms. This removes the need for centralized authority like exchanges and other financial institutions. Simply said, it enables two users to swap assets without the need for a middleman.

Market makers primarily supply liquidity. Liquidity in trade refers to how fast and easily an item may be acquired or sold. Assume trader A wishes to purchase one bitcoin. The centralized exchange that handles the sale has an automatic mechanism in place to identify a seller, trader B, who is prepared to sell a bitcoin at the rate given by trader A. The exchange serves as a go-between in this case. But what if no traders are selling a bitcoin that corresponds to trader A's buy order? The liquidity of the asset (in this case, bitcoin) is low in this circumstance. This suggests that the asset is seeing less trading activity and is more difficult to purchase or sell. This is where the centralized exchange needs market participants. Certain financial institutions or professional traders provide liquidity by matching regular investors' orders with numerous buy/sell orders. The entity that offers liquidity is designated as the market maker.

Automated market makers are a component of decentralized exchanges (DEXs), which were created to eliminate the need for middlemen in the trading of crypto assets. Consider AMM to be a computer software that automates the process of delivering liquidity. These protocols use smart contracts (self-executing computer code) to mathematically establish the price of crypto tokens and offer liquidity. A trade under the AMM protocol does not require the participation of another trader. Instead, you may use a smart contract to exchange. As a result, trades are peer-to-contract rather than peer-to-peer. You must locate an independent ETH/USDT liquidity pool if you wish to exchange one crypto asset for another, such as Ether (Ethereum's native currency) for Tether (Ethereum token tied to the US dollar). As previously stated, the price you receive for an item you choose to buy, or sell is decided by a mathematical formula.

Anyone can be a liquidity provider in AMM if they satisfy the standards specified in the smart contract. In this case, the liquidity provider must deposit a set quantity of Ether and Tether tokens into the ETH/USDT liquidity pool. Liquidity providers can receive fees on trades in their pool in exchange for providing liquidity to the protocol.

AMM contributes to the establishment of a liquidity system in which anybody may participate. This eliminates the need for a middleman, cutting transaction costs for investors. A high level of liquidity is required for robust trade activity. Slippage may occur if there is insufficient liquidity. Low liquidity causes considerable volatility in the market's asset values.

AMMs also allow anyone to become a liquidity provider. They get some of the fees for transactions made on the pool.