This article will help you understand what are the strategies of automated market makers?

Automated Market Maker (AMM) is a decentralized trading mechanism that provides liquidity for token trading without the need for an order book. AMM uses mathematical formulas to calculate token prices and quantities, providing instant trading and eliminating the risk of slippage. It offers the advantages of high liquidity, no counterparty risk, and uses popular strategies including constant product market making, constant sum market making, balanced pool market making, lossy AMM, and aggregated AMM. However, AMM also has limitations such as sensitivity to price fluctuations, high transaction fees, and liquidity risks.

1. Automatic market maker strategy

Automated market maker (AMM) is a decentralized The trading mechanism is driven by smart contracts and provides liquidity for token transactions. It eliminates the need for order books in traditional exchanges by using mathematical formulas to calculate the price and quantity of a token.

2. Advantages of AMM

• No slippage: AMM provides instant transactions, eliminating the risk of large-amount orders. Risk of price fluctuations (slippage).
• High Liquidity: AMM attracts many liquidity providers, providing traders with ongoing trading options, even on less liquid coins.
• No Counterparty Risk: AMM eliminates counterparty-related risks because transactions are executed on smart contracts.

3. Main strategies of AMM

• Constant Product Market Maker (CPMM): Popular strategy used by Uniswap , the token is priced by keeping the product of the two tokens at a constant.
• Constant Sum Market Maker (CSMM): A strategy used by Curve to price tokens by keeping their sum at a constant.
• Balanced Pool Market Maker (BPMM): A strategy used by Bancor that allows traders to hold different proportions of tokens in the pool by adding weights.
• Lossy AMM (LAMM): A strategy used by Balancer that allows liquidity providers to set custom weights and price curves.
• Aggregated AMMs: Strategies like 1inch or Matcha provide traders with the best price and liquidity by pooling liquidity from multiple AMMs.

4. Limitations of AMM

• Price Fluctuation: AMM is sensitive to large price fluctuations, resulting in certain Loss may occur under circumstances.
• High Transaction Fees: Some AMMs charge high transaction fees, especially during periods of network congestion.
• Liquidity Risk: AMM relies on liquidity providers, and insufficient liquidity may lead to difficulties in transaction execution.

By understanding these strategies, investors can take advantage of the advantages offered by AMMs while mitigating the risks associated with them.

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