How Does an Automated Market Maker Work?

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In general, an automated market maker is a platform that allows users to carry out transactions of crypto assets. There are different ways that you can go about this in the crypto world. With an AMM you’re getting a fixed price for that asset that is set by the platform. That can take away the negotiation period that you would have to go through in a centralized exchange platform. In the first days of the crypto industry, you could enter these exchanges, and negotiate the price of an asset with another party. Then buy crypto assets from them at the negotiated price. 

An AMM takes away the negotiation process, as we mentioned, making transactions faster and smoother. Plus, there’s usually no fees involved in any of the transactions. Why is that though? How is a decentralized exchange going to be able to make a profit? We’re going to talk about that here.

 

An AMM Buys Crypto Assets

A decentralized exchange platform has to buy crypto assets to be able to fund the transactions that take place on its site. In a lot of ways, they operate in a way that is similar to how currency exchange facilities in the traditional banking system have operated for years. They will go out and buy crypto assets. In a sense, this gives you the power to set your exchange rate. You want to make sure as a user that you’re working with an AMM that offers good exchange rates. That’s not the end all be all. It’s one of the ways that they operate.

These days, AMM platforms are actually allowing their own users to fund this process. In what they call liquidity pools. These pools allow users to invest in a particular cryptocurrency. That the platform is then going to be used to fund other transactions. The investors in the pool are going to get a fee for lending their cryptocurrencies to the platform. In a way, these AMM platforms are becoming completely sustainable entities. Users should really look into what type of platform they want to enter. Particularly, if they are interested in having the possibility of getting into these types of long term investments.  

Why It Makes Sense To Use An Automated Market Maker

Using this type of platform makes transactions in general much faster. On top of that, these platforms are allowing users to become investors within the same platform. Opening up a whole new avenue in that regard. Overall, there are a ton of opportunities that an AMM brings to the table.

We do want to make something clear though. Even though we are making direct comparisons between an AMM, and a traditional exchange platform there are benefits to both. There’s an argument to be made that because of this both have a place in the crypto-verse. People who go to traditional exchanges are looking for the best value buy. This can be a great idea if you want to hold cryptos or need to access a set amount. An  AMM basically covers the rest of your crypto needs. 

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