What Are AMMs? How Automated Market Makers Revolutionize DeFi | Blum Academy
By Blum
Summary
## Key takeaways - **AMMs Enable Instant DEX Trading**: AMMs are autonomous systems used by DEXes to facilitate trading via smart contracts and liquidity pools, unlike centralized exchanges that match buyers and sellers. Trades happen instantly against liquidity in smart contracts with prices set algorithmically by token balances. [00:11], [00:28] - **Liquidity Pools Use Exact Token Ratios**: A liquidity pool holds two tokens like Ethereum and USDC in exact ratio, such as one ETH worth 2,000 USDC. Providers deposit both and receive LP tokens representing their share, redeemable with transaction fee rewards. [01:06], [01:17] - **Uniswap vs PancakeSwap: Speed & Cost**: Uniswap allows trading a wide range of tokens, while PancakeSwap on Binance Smart Chain offers similar functionality but is faster and significantly cheaper due to lower BSC fees. [01:33], [01:44] - **Curve Specializes in Stablecoins**: Curve Finance specializes in stablecoins, resulting in lower price volatility and less slippage compared to other AMMs. [01:56], [02:10] - **Impermanent Loss from Price Shifts**: Impermanent loss occurs when token values in the pool shift dramatically; withdrawing during fluctuation means losing value versus just holding. No loss happens if prices stabilize. [02:10], [02:22] - **Slippage Hits Large Trades**: Slippage happens when token price changes between trade placement and execution, especially in large trades, as big trades disrupt the pool's token ratios. [02:33], [02:48]
Topics Covered
- AMMs Replace Order Books with Liquidity Pools
- Liquidity Providers Deposit Paired Tokens
- PancakeSwap Beats Uniswap on Speed, Cost
- Curve Dominates Stablecoin Swaps
- Impermanent Loss Hits Volatile Pairs
Full Transcript
hello crypto explorers today we're going to dive into the decentralized finance space called automated market makers or amm and how they've revolutionized
decentralized Finance let's explore an amm is an autonomous system used by decentralized exchanges or dexes to facilitate trading unlike centralized
exchanges where trades rely on matching buyers and sellers amm use Smart contracts and something called liquidity pools to make trades happen instantly so instead of dealing with people you're
trading directly against liquidity stored in smart contracts and prices are determined algorithmically by the balance of tokens in these pools the beauty of this is that everything is
automated and it works 247 let's break it down a bit further a key part of amm is the liquidity pool imagine a pool filled with two types of tokens let's say ethereum and usdc for
example if one ethereum is worth 2,000 usdc the liquidity provider has to deposit both tokens in that exact ratio in return they receive special tokens called LP tokens which represent their
share of the pool these LP tokens Can later be redeemed along with rewards like transaction [Music] fees some of the the most well-known amm include platforms like Unis swap pancake
Swap and curve Finance each has its unique features Unis swap is one of the most popular decentralized exchanges allowing users to trade a wide range of tokens pancake swap is an automated
Market maker amm on the binance smart chain BSC while it shares a similar interface and functionality with Unis swap pancake swap is faster and significantly cheaper thanks to the
lower fees on the BSC Network curve on the other hand specializes in stable coins which means lower price volatility and less [Music]
slippage one of the main risks with amm is impermanent loss which happens when the value of the tokens in the pool shifts dramatically if they withdraw during this fluctuation they might lose some value compared to just holding on
to the tokens but if the price is stabilized there's no loss at all another big risk is slippage slippage occurs when the price of a token changes between the moment you place a trade and
when it's executed especially in large trades this is because the price is determined by the token ratios in the pool and big trades can throw those ratios off [Music]
balance well that's a quick look at how amm work and why they're so important in defi as amm continue to evolve they're shaping the future of decentralized Finance by removing the need for
intermediaries and relying on liquidity pools and smart contracts they're making defi more accessible and efficient for everyone thanks for joining us crypto Explorer want to stay up to date on the latest in the world of cryptocurrency
And blockchain subscribe like and share our channel to never miss a beat see you next time
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