A quick guide to market makers and how they work

Automated market makers (AMMs) - which means automated market makers - are part of the decentralized finance (DeFi) world. They help trade digital money in an automatic way using special pools of money, not like the usual market of buyers and sellers.

In simple words, think of an AMM as a program that helps traders swap two different things at a fair price.

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How does it do its job?

When we say "liquidity," we mean the ability to easily turn one thing into another, like changing one kind of money into another. Before AMMs, there wasn't much liquidity in decentralized exchanges on Ethereum. It was tough to find enough people who wanted to trade because it was new and confusing.

AMMs fix this problem by using special contracts that decide the fair price for swapping two kinds of digital money. They create special pools of money, and people who add money to these pools get a reward for doing it. The special contracts then make the money swap automatically based on a special math rule, not like in regular money markets where people place orders. The more money in a pool, the easier it is to trade on these special exchanges.

Who can join the money pool?

AMMs are for everyone. If you have an internet connection and some kind of special digital money (ERC-20 token), you can add it to a money pool and earn rewards or do "yield farming." If you want to learn more about yield farming, check out our website.

To sum up

AMMs are not just about making it easier to swap money. They also make the market safer and better for everyone. As DeFi grows fast, AMMs will keep playing a big role in its growth. They're a special part of DeFi and have their own place because they're easy to use.