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Automated Market Makers (AMMs) have played an important role in catapulting Decentralized Finance (DeFi) to the forefront of the crypto markets.
In our DeFi Unlocked series, we dive into space to understand the main players and features present. In this article, we will explore automated market makers and list four MAs in 2020.
A little background
AMMs are the brainchild of Vitalik Buterin, co-founder of Ethereum (ETH). Originally described in a Reddit post four years ago, AMMs have grown from an idea to a powerful application in decentralized finance.
The first AMM to go live on the Ethereum blockchain was Bancor (BNT). After an initial coin offering of $ 153 million in 2017, the Bancor Protocol caused a stir when it entered. However, the project suffered a number of setbacks, including a theft of $ 23 million, which reduced public confidence in Bancor and AMMs. In 2018, a new project called Uniswap (UNI) saw the light of day, effectively curbing the glory days of AMM.
MAs can provide liquidity in one of two ways: either through a centralized group of professional market makers, or through a fully automated process defined by an underlying algorithm. The latter is open to any party, while the former has eligibility conditions for parties wishing to participate as a liquidity provider (LP).
Kyber Network (KNC) is an example of AMM that falls into the first category, while Uniswap, Balancer and Curve, which are more decentralized, fall into the latter category.
Four automated market makers
Currently, there are several automated market maker applications active in the market. However, not all MAs are created equal. It is prudent to choose those which have the best characteristics and are the most robust.
In this section, we’ll discuss four popular MAs, using data from DefiPulse and Coingecko (as of November 4).
| Project | Release date | Total Locked Value (TVL) | Governance token | Costs | Exchange pairs |
|---|---|---|---|---|---|
| Balance | march 2020 | $ 224.9 million | BALL | Customs charges (0.001-10%) | 229 |
| Uniswap | november 2019 | $ 2.61 billion | United | 0.30% | 3,062 |
| Curve | Jan 2020 | $ 767.1 million | CRV | 0.04% | 23 |
| Kyber Network | february 2018 | $ 10.3 million | KNC | 0.10% |
Balance
Balancer defines itself as “a protocol and a non-custodial portfolio manager designed for programmable liquidity”. The protocol is an open source AMM that allows any user to earn income by exploiting their holdings in crypto-assets. By adding their tokens to a cash pool, users earn the right to collect fees when transactions are facilitated through the pool.
While most AMMs work this way, Balancer stands out from the rest of the pack because it allows users to create pools with up to eight tokens. Additionally, Balancer supports customization of ratios and trading fees for each asset, allowing LPs to get the most out of their funds.
Launched in June 2020, Balancer has a native governance token called BAL. It’s important to note that Balancer pioneered cash mining.
Uniswap
As mentioned earlier, Uniswap was the second entry to the AMM scene. However, Uniswap has the distinction of being the first decentralized AMM. Launched in November 2018, Uniswap is a decentralized, open-source protocol that provides near-instant automated liquidity without relying on an order book.
Uniswap takes advantage of liquidity providers that deposit two ERC-20 tokens into a pool to support transactions. In return, liquidity providers get a reduction in trading fees commensurate with their contribution. To keep the market stable, Uniswap uses a mathematical equation that defines the ratios of tokens held in the pool.
Uniswap has just launched its governance token, UNI, via a large-scale airdrop in September 2020, rewarding the first users of the platform.
Curve
Curve was launched in January 2020 with the aim of providing immediate liquidity in its Decentralized Exchange (DEX) function for stable coins. Similar to its counterparts on this list, Curve facilitates transactions using liquidity provided by market participants.
Defining itself as an “Ethereum exchange liquidity pool designed for extremely efficient, low-risk stablecoin trading, additional fee income for liquidity providers, with no opportunity cost,” Curve’s focus on stablecoins helps minimize slippage and trading fees for larger transactions.
Curve can be used by both individuals and smart contracts, and the protocol features a native governance token called CRV.
Kyber
The Kyber Network is one of the first AMMs to enter the market, debuting in February 2018. Unlike the other AMMs on this list, Kyber Networks’ liquidity pools are not open to anyone. Liquidity pools are created either by its team of developers or by professional market makers.
The price of the tokens in the liquidity pool is determined either through external oracles or through a smart contract. It is designed in this way to allow market makers to have better control of the pool during volatile seasons.
Kyber Network describes itself as a blockchain-based liquidity protocol that aggregates liquidity from a wide range of reserves, fueling the token exchange “in any decentralized application.” It has a native token called KNC.
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