What is AMM and its current state?

Decentralized Finance (DeFi) is one of the most eye-catching fields in DApps, and the automated market maker, also known as AMM, is the rising star in the DeFi space. AMM has changed the classic order book mechanism used by centralized exchanges, instead, it uses liquidity provided by users to form a pool, and market-making according to a deterministic function. Traders can obtain better liquidity, while ordinary users can get a profit from transaction fees as long as they use idle assets to provide liquidity.

AMM has slowly become the mainstream inDeFi due to its simplicity and easiness to use. It allows everyone to become a liquidity provider. AMM allows users to interact with liquidity pools on the blockchain in a completely decentralized and non-custodial manner, providing liquidity for exchanges while earning income. The liquidity pool funds are controlled by “decentralized open-source smart contracts”, and all AMM transaction data is on the chain.

The AMM model was first put into use by Bancor, but Uniswap was the one to popularize AMM. Uniswap uses a simple function, X * Y=K, as its AMM model which depicts the underlying logic of a market-buying supply and demand relationship: the smaller the quantity of a certain kind of goods, the higher the price; the larger the quantity of a certain kind of goods, the lower the price. This simple function caused an explosive wave in 2019.

According to data released by Decrypt at the end of February 2021, the total number of global crypto users has exceeded 100 million, while DeFi users are only nearing 1.2 million, accounting for only a little more than 1% of the total number of crypto users. According to a report released by Coinbase, the total trading volume of the current DeFi protocol has exceeded US$25 billion, a year-on-year increase of 2500%. Uniswap claims to have 200,000 to 500,000 users, while most other DeFi applications have between 25,000 and 50,000 users.

These data represent that for most users, DeFi is still an “early adopters” game. The road to decentralized finance requires long-term accumulation which poses a great opportunity for DeFi developers —…

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