Crypto Education: Automated Market Makers (AMM) explained | Animation | Cryptomatics

Hi and welcome to a new Cryptomatics episode! Today we will briefly explain what Automated
Market Makers are and their importance in the DeFi space. We will also talk about what DeFi is, what
transactions in this sector entail, the most popular AMMs, and how to use such a protocol. What is DeFi, in short? What is its purpose? Decentralized Finance, or DeFi in short, is
a financial ecosystem based on Blockchain technology.

Its purpose is to provide anyone with open-source,
transparent financial services that, above all, work and operate without being managed
by a central authority, unlike the classic financial system, in which banks represent
that authority. How do transactions work securely in DeFi? Any data or value transfer in the DeFi area
is based on Smart Contracts. If in the classical system, the agreements
between various entities are materialized by contracts and mutual consent, in DeFi,
the consensus between the contracting parties is established and respected based on protocols
that are pre-established by computerized code.

The advantage is that, since they are fully
processed by a computer, Smart Contracts ensure a higher speed of execution, and the risks
of human error are reduced. At the same time, the disadvantage would be
that a line of code may include bugs or that the information integrated here could be accessed
and/or hijacked. What are Automated Market Makers? What role do they play in the DeFi space? Automated Market Makers are a class of decentralized
exchanges that rely on an algorithm to determine the price of a digital asset and work with
pairs of exchangeable assets. These protocols are actually based on Smart
Contracts that automatically set and offer an exchange price between two digital assets. These assets will thus be automatically exchanged
between them, based on an algorithm, and not an order book, as is the case with traditional
finances. Therefore, the entities participating in that
exchange interact only with that Smart Contract and not with each other. What are some of the characteristics of AMMs? The first important feature of an AMM would
be that, as a rule, it sets a single price for the exchange between 2 digital assets.

Secondly, the price thus set is known and
therefore consistently visible to all exchange participants. The third characteristic is that AMMs do not
hold equity to facilitate trades but must store it from third parties, considered to
be participating in this consensus. The capital thus received is stored in what
we call liquidity pools, and those who contribute to maintaining these pools receive a percentage
of the trading fees charged by an AMM. What are the most popular AMMs? Uniswap It is the most popular AMM, being built on
the Ethereum blockchain in 2018. Thus, this decentralized exchange supports
any ERC-20 token and specific infrastructure, including being integrated with digital wallets,
such as MetaMask or MyEtherWallet.

The reason it is so popular is simple it's completely open-source and anyone can
use its code, thus laying the groundwork for their own decentralized exchange. Furthermore, users can list their own tokens
and have full and permanent control over the assets. Balancer When it comes to this AMM, most users and
analysts define it as complementary to Uniswap. It is built on Ethereum and can be compared
to an index fund, as users can create such funds in their portfolios. Balancer pools are public or private liquidity
pools, in which smart contracts consistently provide a balanced proportion of assets, even
if the prices of shared tokens may vary. What sets Balancer apart is that a pool can
integrate up to 8 different tokens. Kyber Network Like any AMM, this is a decentralized protocol
that allows the exchange of tokens without intermediaries, based on KyberSwap – its exchange.

It is based on a Decentralized Autonomous
Organization (KyberDAO) made up of holders of its native token, KNC (Kyber Network Crystal). It can be integrated with dApps, DeFi platforms,
and crypto-wallets, and although it can be implemented on any blockchain, it works on
Ethereum, starting in December 2020. Curve This AMM is characterized by low exchange
fees and low slippage. This is possible because all the liquidity
pools it includes are made up of tokens that behave very similarly. However, this means that liquidity providers
also receive lower fees for storing their tokens in these pools. Still, to encourage them, Curve can be integrated
with other external DeFi protocols and offers rewards in CRV tokens.

How to use an AMM If you want to successfully use an AMM protocol,
you need to access its online platform. At the same time, when creating your account,
you'll need to connect a digital wallet to it. Subsequently, you can choose what asset you
want to exchange and follow the steps to confirm transactions from and to your digital wallet.

As with an exchange, if you want to participate
in a liquidity pool, you also need to connect the digital wallet and set in the liquidity
provider section how many and what kind of assets you want to include in that pool. As a rule, to successfully contribute to these
liquidity pools, you will need to offer both types of assets that participate in the exchange
– that is, if an ETH is, let’s say, the equivalent of 400 Dai, then it will include
1 ETH and 400 Dai simultaneously. After you successfully trade the assets in
that pool, you will receive a token attesting that you are participating in that liquidity
pool. I hope you enjoyed this informative video,
and if you still have questions about Automated Market Makers, don't hesitate to tell us what
other type of content would help you better understand these concepts. Don't forget to subscribe to the Cryptomatics
channel if you're interested in having constant access to even more information about the
DeFi sector..

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