What's Automated Market Making (AMM)

What is Automated Market Making (AMM)?

Automated Market Making (AMM) is a protocol that automatically calculates buying and selling prices according to a formula to provide a continuous quotation for the market. In terms of trading mechanism, CoinEx combines AMM with the order book, and the system automatically converts 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 fees earned by CoinEx.

 

About AMM Algorithm

CoinEx AMM uses the "Constant Product Market Maker" model, which means users need to deposit two different cryptos into the liquidity pool, and the product of a trading pair's balances remains unchanged.

There are two algorithms applied by CoinEx:

1. "Infinite Constant Product Market Maker" algorithm: mainly adopted in non-stablecoin markets, e.g. CET/USDT. This algorithm provides market liquidity no matter how high or low the price is.

2. "Finite Constant Product Market Maker" algorithm: mainly adopted in stablecoin markets, e.g. USDC/USDT. This algorithm provides market liquidity in a specific price range, improving capital utilization. 

 

What is Liquidity Pool?

Liquidity pool contains the assets used for AMM. Based on the "Constant Product Market Maker" model, the total value of each token in a liquidity pool must remain the same. Liquidity Providers (LPs) will gain 50% of the trading fees generated in the pool by adding liquidity. The daily profits also will be added to the pool, and can be withdrawn all at once when the liquidity is removed.

In AMM markets, each trading pair has a liquidity pool that contains two assets and executes the rule of trading assets, and adding or removing liquidity.

The rule stipulates that the total value of each token in a liquidity pool must remain the same. Therefore, when the amount of token A decreases, the amount of token B should increase according to the formula X * Y = K (a fixed constant).

 

What is AMM Market?

Any market that supports automated market making is an AMM market. The AMM market adopts a different fee system. VIP does not enjoy any rate discounts, and using CET to deduct transaction fees is unavailable.

User Types

Rate in Non-stablecoin AMM Markets Rate in Stablecoin AMM Markets
Normal Accounts 0.30% 0.10%
Market Maker Accounts 0.15% 0.05%

 

Characteristics of CoinEx AMM

1. Profits from automated market making

Liquidity Providers (LPs) share 50% of the total trading fees generated in the pool as profits. The profits of a single LP depend on the liquidity percentage.

2. Cumulate daily profit and withdraw all at once

The profits are calculated daily and will be allocated to the LP's AMM account before 4:00 (UTC) the next day. When an LP removes liquidity from the pool, the cumulative profits also will be withdrawn all at once.

3. Free access, free of charge

Assets can be transferred between Spot account and AMM account in real time by adding and removing liquidity. Each LP can add liquidity twice per market per day with zero fees.

 

Fees and Profits

Profits of CoinEx AMM mainly come from the trading fee income allocated by CoinEx. Users who provide liquidity to the pool can share 50% or more (100% for all CET AMM markets) of the trading fees generated in the pool depending on the liquidity percentage.

The profits are calculated once a day and will be automatically deposited into the AMM account the next day. The accumulated profits can be withdrawn all at once when liquidity is removed.

Suppose that the total trading fees of the LBC/USDT pool on a certain day are 100 USDT and 400 LBC. If Alice adds 10% liquidity to the pool, she will get 5 USDT and 20 LBC as profits. The calculations are as follows:

USDT: 100 * 50% * 10% = 5 USDT

LBC: 400 * 50% * 10% = 20 LBC

Note: If Alice adds liquidity to CET/USDT market, she can share 100% of the trading fee income according to her liquidity percentage.

 

What Markets Support AMM?

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

Notes:

1. More trading pairs will be listed in AMM markets, please stay tuned.

2. LPs in CET/USDT, CET/BTC, CET/BCH, and CET/USDC AMM markets can share 100% of the trading fees generated in the liquidity pool depending on the liquidity percentage. For the rest of AMM markets, the proportion is 50%.

 

Risk Warning

The assets in the AMM Account will be added to the liquidity pool for automated market making. Due to price fluctuations, impermanent losses might occur and the amount of the two assets might change when the liquidity is removed. 

Impermanent loss will gradually be wiped out when the price ratio changes back and eventually, users can gain profits from providing liquidity.

 

 

Related Articles

What's Impermanent Loss and How to Avoid It

How to Add or Remove Liquidity

How to Check AMM History