The AMM Edition (Part I) | DeFi Download

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Dear Bankless Nation 🏴,

Stablecoins and lending markets are essential to so much of what we do in decentralized finance, but DeFi as we know it would not be possible without Automated Market Makers. AMMs power decentralized exchanges, which allow users to swap cryptocurrencies with each other. Such swapping is a key DeFi innovation and has helped to usher in a new era of financial self-sovereignty.

Prior to AMMs, the only way to acquire cryptocurrency was to mine it or buy it through a centralized exchange, what in traditional finance is known as the order book model. With the order book model, a buyer had a price and a quantity in mind and a seller had the same — when these prices and quantities matched up, an asset exchange occurred. With the advent of AMMs, out went the order book and in came the smart contract.

At their most basic level, AMMs are smart contracts that create asset pools enabling users to exchange cryptocurrencies without an order book or a trusted counterparty. The liquidity pools upon which AMMs are built typically consist of two or more assets, and the algorithm governing the pool sets the price for the tokens. When a user wants to swap tokens, they connect to the DEX, select the tokens to swap, confirm the transaction, and the liquidity pool smart contract does the rest. While it seems almost too easy, the liquidity pool is the key to a functioning AMM.

Part I of this AMM Edition of the DeFi Download will cover all of this and more, equipping you to competently and confidently interact with DEXs and provide liquidity to pools. Although AMMs as we know them are only a few years old, as you’ll understand after reading this issue, they are the future of finance.

Contributors: BanklessDAO Writers Guild (authors)

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From ‘Castle Ethereum,’ by Perchy

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Why AMMs?

by Jake and Stake