Automated market makers (AMMs) have played a significant role in catapulting decentralized finance (DeFi) to the forefront of the crypto markets.
In our DeFi Unlocked series, we delve into the space to understand the key players and features present. In this article, we will explore automated market makers and list four AMMs in 2020.
A little background
AMMs are the brainchild of Vitalik Buterin, Co-founder of Ethereum (ETH). Initially described in a Reddit post four years ago, AMMs have grown from an idea to a powerful application in decentralized finance.
The first AMM to go live on the Ethereum blockchain was Bancor (BNT). Following a USD 153m initial coin offering in 2017, the Bancor protocol made quite the splash on its entry. However, the project suffered a number of setbacks, including a USD 23m theft, which diminished public confidence in both Bancor and AMMs. In 2018, a new project called Uniswap (UNI) emerged, effectively reining in the AMM glory days.
AMMs may provide liquidity in one of two ways: either by a centralized group of professional market makers or via a fully automated process defined by an underlying algorithm. The latter is open for any party to join, while the former has eligibility requirements for parties wishing to participate as a Liquidity Provider (LP).
Four automated market makers
Currently, there are several active automated market maker applications in the market. However, not all AMMs are equal. It is prudent to pick the ones that have the best features and are most robust.
In this section, we shall discuss four popular AMMs, using data from DefiPulse and Coingecko (as of November 4).
|Project||Launch Date||Total Value Locked (TVL)||Governance Token||Fees||Trading Pairs|
|Balancer||Mar 2020||USD 224.9m||BAL||Custom fees (0.001-10%)||229|
|Uniswap||Nov 2019||USD 2.61bn||UNI||0.30%||3,062|
|Curve||Jan 2020||USD 767.1m||CRV||0.04%||23|
|Kyber Network||Feb 2018||USD 10.3m||KNC||0.10%|
Balancer defines itself as “a protocol and non-custodial portfolio manager designed for programmable liquidity.’’ The protocol is an open-source AMM that allows any users to earn an income by leveraging their cryptoasset holdings. By adding their tokens to a liquidity pool, users earn the right to collect fees when trades are facilitated via the pool.
While most AMMs work in this manner, Balancer distinguishes itself from the rest of the pack because it allows users to create pools with up to eight tokens. Additionally, Balancer supports the customization of the ratios and trading fees for each asset, allowing LPs to make the most of their funds.
Launched in June 2020, Balancer has a native governance token called BAL. It is important to note that Balancer pioneered liquidity mining.
As mentioned earlier, Uniswap was the second entry into the AMM scene. However, Uniswap holds the distinction of being the first decentralized AMM. Launched in November 2018, Uniswap is a decentralized, open-source protocol that provides near-instant, automated liquidity without relying on an order book.
Uniswap leverages liquidity providers who deposit two ERC-20 tokens into a pool to support trades. In exchange, liquidity providers get a cut of the trading fees proportionate to their contribution. To keep the market stable, Uniswap employs a mathematical equation that defines the ratios of the tokens held in the pool.
Curve launched in January 2020 with the aim of providing immediate liquidity in its function as a decentralized exchange (DEX) for stablecoins. Similar to its counterparts in this list, Curve facilitates trades by using liquidity provided by market participants.
Defining itself as an “exchange liquidity pool on Ethereum designed for extremely efficient stablecoin trading and low risk, supplemental fee income for liquidity providers, without an opportunity cost”, Curve’s focus on stablecoins helps to minimize slippage and trading fees for larger trades.
Curve can be used both by individuals and smart contracts, and the protocol features a native governance token called CRV.
The Kyber Network is one of the earliest AMMs to enter the market, making its debut in February 2018. Unlike the other AMMs on this list, Kyber Networks liquidity pools are not open to anyone. The liquidity pools are created either by its developer team or professional market makers.
The price of the tokens in the liquidity pool is determined either through external oracles or via a smart contract. It is designed this way to allow market makers to have greater control of the pool in volatile seasons.
Kyber Network describes itself as a blockchain-based liquidity protocol that aggregates liquidity from a wide range of reserves, powering token exchange “in any decentralized application.” It has a native token called KNC.
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