An automated market maker (AMM) is a protocol / set of programmed rules to allow peer to peer asset exchanges. For now, they are only used in decentralized cryptocurrency exchanges (DEXs) and are run by smart contracts.
Smart contracts are programs that live on blockchains. They can’t be changed once uploaded and wait for interactions by decentralized apps (DApps). Therefore, a DEX is a type of DApp.
AMMs allow for liquidity pools used in decentralized asset trading. This means there is no middleman (trading site). The trades are all run by code and interact with peoples’ crypto wallets only.
In many cases, liquidity pools are funded by crypto investors that stake, or put up some cryptocurrency to get payouts. Fees can also be rewards. Staking on DeFi could be considered the new “interest earning account”. It’s one more reason that banks are obsolete, in my view.
The Future of Liquidity and Trading
I see the decentralized finance ecosystem beginning to stitch together to allow gigantic, global liquidity pools for traders to exchange 24/7. Blockchains and DEXs are beginning to inter-operate. Coins are being “wrapped” and “locked up” for cross chain trades, too.
Fiat (country) currency is being digitized on various blockchains and called “stablecoins”. Commodities and other traditional assets are being “tokenized” as well.
Read the last couple sentences again and think about where this is heading. Everything will be traded on blockchains and decentralized networks without intermediaries. It feels like a tidal wave that is dissolving the central banking beaches.
There will be a re-balancing and revaluation of all currencies and assets in the coming years as DeFi unties the knots in global trade. Humanity’s banking system is being upgraded on the Internet every day. It is being transformed into DeFi, in other words.
Old Banking is Transforming
Centuries old banking structures are being revolutionized. This is a big part of the chaos of today. Banks have run countries and empires throughout civilization. That is all changing right now.
Bottlenecks are going away, so the values of assets will continue to shift away from fiat currency dominant, especially USD. As crypto takes more of a central role in value exchange over the web, we will be glad we are invested now, in my opinion.
Automated market makers and liquidity pools powered by smart contracts and third generation blockchains will power global finance in the coming years. This is not advice, but I like the five coins that are ISO 20022 compliant since it makes them most likely to be mass adopted: XRP, XLM, ALGO, XDC, and IOTA. I can certainly be wrong, of course.
They seem to be the ones with the most speed, lowest fees, and the best consensus mechanisms for energy efficiency.
AMMs and liquidity pools run by smart contracts will be the basis of trade. It makes sense for you to study these “buzz words” if you want to get ahead in the new DeFi world.