What Is an Automated Market Maker (AMM)?

Automated Market Maker
Automated Market Maker

An automated market maker, also known as an AMM is a decentralized platform that offers users a wide variety of crypto solutions. It’s not a criticism of cryptocurrencies or traditional exchange platforms to say that in the first days of Bitcoin what investors could do with cryptocurrencies was quite limited. There’s an argument to be made that that’s why in those days there was such a big push to have establishments accept crypto payments. Through an AMM or even a traditional decentralized exchange investors have way more things that they can do with their assets.

The main difference between an AMM and a traditional decentralized exchange is that in an AMM essentially the system is going to give you the price on the asset that you want to buy. Provided for example that you want to process a transaction USD to ETH. You don’t have to find a trade partner if you will, as you did back in the traditional exchange world. Also, these marketplaces have developed a concept called liquidity pools that in many ways allow them to offer different types of financial instruments as well as investment opportunities for users.

Trading Assets Through An AMM

There are a ton of different assets that you’re going to be able to trade through an AMM. The type of assets that are going to be available to you are going to be dependent on the platform that you ultimately decide to use. Therefore, it’s very obvious that you’re going to want to make sure that the asset that you’re interested in is offered by the platform that you chose. You can trade stablecoins for example to be able to process a transaction of money with another user potentially over the sale of an actual product. Through a platform you’ll be able to get the advantages of using a cryptocurrency without the volatility that most of the popular cryptos feature.

Peer to peer transactions and holding crypto assets long term are not the only activities that you’re going to be able to perform through an AMM. One of the main reasons why people are flocking to these types of platforms is the fact that they are offering other forms of investment. Allowing people to put their money to work for them without necessarily getting into the hectic world that is day trading.

Liquidity Pools As Potential Investments  

Why are liquidity pools a good idea as an investment? Well because you’re effectively taking on the role of the platform’s bank. Users of a platform can buy shares or parts of a liquidity pool, these pools are used to fund the transactions on the platform itself. You have to buy, for example ETH, and deposit it in the pool. The process is done automatically for you in most cases. What happens is that you’ll gain interest fees when the platform borrows coins from your pool. It’s a good way to invest in cryptos long term while earning dividends from your investment. There are a couple of things that you want to look into, but those are the basics.

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