What is Automated Market Maker (AMM)?
Let's find out Automated Market Maker (AMM) meaning, definition in crypto, what is Automated Market Maker (AMM), and all other detailed facts.
An automated market maker (AMM) is an autonomous protocol used by decentralized exchanges (DEX). The protocol uses smart contracts to provide liquidity to the exchange that traders can pool into. These smart contracts are known as liquidity pools.
Those contributing to the liquidity pool can earn passive income via trading fees. The income is calculated based on the percentage of their contribution to the pool. Uniswap, one of the best-known DEX platforms, uses this model of liquidity contributions and asset gains.
AMM systems were first developed in the 1990s by Shearson Lehman Brothers and ATD. Prior to the development AMMs, people would manually record liquidity-generating trades in order books.
However, order books were considered flawed, as they caused latency in price discovery on different markets. Besides, market makers who kept these books were capable of manipulating the records. Automated market makers were able to solve these issues and reduce the risk of human error or market fraud.