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Many cryptocurrencies are on the rise slightly, but this is not the case in an alternate season. Automated market makers have taken their place and generate income for their holders and participants.
Automated Market Makers (AMMs) seek to operate on the efficiency limits of smart contract blockchains, in particular Ethereum. Before AMM was put forward, a classic order book system was tried for Ethereum-based decentralized exchanges, such as EtherDelta or 0x.
However, they were plagued by liquidity issues as any order required gas and waited for block approval periods. Ethereum’s poor performance means that only a limited number of requests can be made before those orders are fully overwhelmed by the blockchain.
The benefits of MAID are described in a Tweeter by analyst Jack Purdy.
The future success of AMMs is largely based on the fact that they serve two niches: Keycap digit one Incentive liquidity provision Jack Purdy @ jpurd17 via Twitter
Users communicate with the liquidity pool when dealing on an AMM. Under the hood, the consumer sent their tokens, such as ETH, to the cash pool when they asked the smart contract to complete a transaction.
A mathematical formula determines how many tokens the other side of the pair can get – say, Dai – in exchange. This assures a minimum of slippage between the purchase price and the sale price.
Low Slippage on Priced Stable Assets (Stablecoins, Indexed Assets) Compressed price curves such as @CurveFinance may actually provide superior product compared to CLOBs Jack Purdy @ jpurd17 via Twitter
There is a slippage in every transaction. How the size of the order determines the final price for buying or selling an item. The hyperbolic form occurs with small orders, but the slippage increases exponentially for large orders. This basic formula is used for Uniswap, although other platforms may use more complex math to finalize the slide.
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