Market makers refer to traders who provide buy and sell quotes on trading platforms. They have two main roles: one is to enhance market liquidity, allowing traders to more easily buy and sell digital assets at reasonable prices; the other is to help stabilize currency prices and curb drastic price fluctuations and manipulation.
So in my opinion, market making is to provide a certain amount of heat to the market and also provide a certain amount of liquidity.
So, what is automated market making?
This brings us to DEX (decentralized exchange).
DEX is a blockchain-based trading platform that does not require users to store funds and data on the server, but directly conducts transactions between buyers and sellers. The advantages of DEX are that it is safer, freer, and more transparent, while the disadvantages are that it is less efficient, has poor liquidity, and is more complicated to operate.
In order to solve the shortcomings of low efficiency and poor liquidity, AMM emerged. AMM is a protocol that provides support for decentralized exchanges (DEX) of cryptocurrencies. AMM is a mechanism that automatically sets asset prices through liquidity pools, without the need for traditional order books or centralized exchanges. Liquidity pools are smart contracts composed of two or more assets. Users can deposit or withdraw assets into or out of the liquidity pool and receive a certain percentage of the handling fee income.
AMM allows anyone to become a liquidity provider, put their assets into a public pool, and earn income from transaction fees.
AMM calculates the transaction price based on the quantity and proportion of various assets in the liquidity pool, usually expressed using a mathematical formula. For example, Uniswap uses the formula x*y=k, where x and y represent the number of two tokens in the liquidity pool, and k is a fixed constant. When users trade tokens on Uniswap, they change the quantity and proportion of various tokens in the liquidity pool, which affects the transaction price.
AMM for NFTs
We all know that liquidity is particularly important in the financial field. This is true not only for DeFi, but also for NFT. Although the world's top 15 NFT trading markets, such as Opensea, Blur, and Magic Eden, occupy the vast majority of the global NFT market, their total trading volume is still less than 2% of decentralized cryptocurrency exchanges. The problem of insufficient liquidity not only affects the trading experience between NFT users, but also hinders the further expansion of NFT.
Therefore, the purpose of developing AMM on NFT is to improve the liquidity of NFT and solve the dilemma that most NFTs fall in value after mint.
Common NFT AMMs include Uniswap, Balancer, Sushiswap, etc. The most popular AMM algorithm for NFT is the Constant Product Market Maker algorithm (CPMM), which was first introduced by Uniswap for fungible tokens. In CPMM, the product of the number of tokens in each pool remains constant, which means that as the supply of a token increases, the price of that token will drop to keep the product constant.
For NFTs, the CPMM algorithm is modified to take into account the uniqueness and rarity of each NFT. Instead of using the number of tokens in each pool, the algorithm uses the rarity and demand of each NFT to determine its price. This creates a more efficient and fairer market for NFTs.
The reason why NFT AMM has not done very well at present is that NFTs are different tokens. NFTs have a small supply, a large demand, and are scarce, making it difficult to unify pricing.
In addition, due to the high volatility and lack of liquidity of NFTs, it is difficult for AMMs to use these fees to incentivize liquidity providers of NFT AMMs.
But it is undeniable that NFT AMM technology has continued to improve over the years. Innovations such as partial ownership of NFTs, smart mining pools, and governance tokens help solve some technical and economic challenges of NFT AMM. We look forward to seeing more progress in the future.
