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 an 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:

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

The other is the "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 The daily profits will also be added to the pool, and can be withdrawn all at once when the liquidity is removed.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 quantity of token B should increase according to the formula X * Y = K (a fixed constant).

 

What is AMM Market?

A market that supports automated market making is an AMM market. Compared with normal markets, 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 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 will also 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 dividends allocated by CoinEx. Users who provide liquidity to the pool will gain 50% or more (100% for all CET AMM markets) of the trading fees generated in the pool. 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.

For instance:

Let’s assume 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:

USDT100 * 50% * 10% = 5 USDT

LBC400 * 50% * 10% = 20 LBC

Note: The dividend proportion will go up to 100% if Alice adds liquidity 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 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. For the rest AMM markets, the dividend 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.

 

Related Articles

What is Impermanent Loss?

How to Add or Remove Liquidity?

How to Check AMM Records?