Automated Market Maker (AMM)
In general, protocols and applications use automated market makers(AMMs) for token swaps and price discovery. AMM is a method that automates the digital asset trading process without authorization or maintaining an order book. Trades are facilitated using liquidity pools that emulate buyers and sellers. AMMs can provide deep liquidity, reduce transaction costs, and have 100% uptime for as many customers as necessary.
AMMs use a constant-product formula (x*y = k) to conduct token swaps. Where x represents the value of one token in the liquidity pool and y represents the value of the other. Since k is a fixed constant in this calculation, the pool's total liquidity will always remain the same.
Although there is a significant body of research and development with AMM, most of it is focuses on serving token swaps. This concept can’t be directly applied to derivatives, such as perpetual contracts, as it is challenging to make derivative assets compatible with current AMM designs. This is due to the fact that they usually include some form of leverage.

Advantages

  • Decentralized trading
  • Deep liquidity
  • Market efficiency

Current Constraints

  • High slippage
  • Smart contract risk
  • Impermanent loss
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