What is Automated Market Making (AMM)?

What is Automated Market Making (AMM)?

Automated Market Making (AMM) is a pattern that calculates buying and selling prices according to a formula automatically to provide a continuous quotation for the market. CoinEx combines AMM with an order book in terms of trading mechanism, and the system will automatically convert the liquidity pool into an order book.

CoinEx AMM allows every user to become a market maker. By adding liquidity to the liquidity pool, users can share the trading fee earned by the platform.

About AMM Algorithm

CoinEx applies the "constant product market maker formula" algorithm in AMM, which means when adding liquidity to the liquidity pool, users have to provide two different assets, and the quantity of the two assets will remain a constant product.

There are two algorithms applied by CoinEx: One is the "Infinite constant product market maker formula" algorithm, which is characterized in the firm liquidity provision to the market no matter how large the order book is or how small the liquidity pool is, mainly adopted in normal markets (e.g. CET/USDT).

The other is the "Finite constant product market maker formula" algorithm which improves fund utilization rate and brings firm liquidity to the market in a certain price range, mainly adopted in stablecoin markets (e.g. USDC/USDT).

What is Liquidity Pool?

Liquidity Pool contains the assets that are used for AMM. During trading, the product of the quantity of two assets would remain a constant, known as CPMM（Constant Product Market Maker). Liquidity Providers (LP) would gain 50% of the trading fee generated in the pool by adding liquidity to the pool.

In AMM markets, every trading pair has an asset pool and that is where the liquidity adding, liquidity removing and trading rule happen. The trading rule stipulates that the product of the quantity of 2 coins should remain constant, thus, when the quantity of coin A decreases, the quantity of coin B should increase according to the rule A * B= the constant.

What is AMM Market?

A market that supports automated market making is an AMM market. Compared with normal markets, the AMM market adopts an independent fee system. VIP does not enjoy any rate discounts, and using CET to deduct transaction fees is unavailable.

Characteristics of AMM

1. Yield from automated market making
Liquidity Provider (LP) gains 50% of the trading fee generated in the pool as returns in total. The return of a single LP depends on the proportion of assets the user owns in the pool.

2. Cumulate daily profit daily and withdraw all at once
The interests an LP earned from the trading fee are calculated daily and will be allocated to your AMM account before 4:00 (UTC) the next day. When an LP removes the liquidity from the pool, your cumulative interests will also be withdrawn all at once.

3. Free access, free of charge
Assets between Spot Account and Market Making Account can be transferred in real-time by adding and removing liquidity, and no fees will be charged during the operation.

Fees and Revenues

Revenue of CoinEx AMM mainly comes from the transaction fee dividends allocated by the platform. Users who provide liquidity to the pool would gain 50% or more (100% for all CET trading AMM markets) of the trading fee generated in the pool. The revenue is calculated once a day and arrives the next day, which will be automatically deposited into the MM account. The accumulated revenues can be obtained when liquidity is withdrawn.

For instance:
Let’s assume that the total transaction fees of the LBC/USDT trading pair on a certain day are 100 USDT and 400 LBC. If user Alice provides 10% of the LBC/USDT pool assets, she will get 5 USDT and 20 LBC as her revenues of joining LBC/USDT AMM market. The calculations are as follows:
(1) USDT：100 * 50% * 10% = 5 USDT
(2) LBC：400 * 50% * 10% = 20 LBC
*The proportion will rise from 50% to 100% if Alice provides assets to CET/USDT market.

What markets support AMM?

CoinEx has 350+ AMM markets at present, please click here to check all AMM markets and further information such as total liquidity, 7 days’ value, 7 day APY, etc.

Notes:

1. More AMM markets will be launched in the future, please stay tuned.
2. Users joining CET/USDT, CET/BTC, CET/BCH, CET/ETH, CET/USDC AMM markets can share 100% of the trading fee generated in the liquidity pool. For the rest of the AMM markets, the sharing proportion would be 50%.

Risk Warning

The assets in the Market Making Account will be injected Into the liquidity pool for automated market making. When the price fluctuates, impermanent losses might occur and the amount of the two assets might change when removing liquidity. More details about impermanent losses.