This article analyze if AMM can be future of DeFi? The growing popularity of cryptocurrency and crypto-based assets primarily relies on their ability to retain value without any intervention from central authorities. DeFi, also known as Decentralized Finance, will take the crypto game to another level. DeFi will offer an array of banking and financial services to enhance productivity and use cases for investors in the crypto world.
What are AMM?
AMM are acronyms for Automated Market Makers, which enable the automatic trading of digital assets without permission, using liquidity pools, unlike the traditional market of buyers and sellers. A conventional market structure, like a commodity or stock market, works on an agreement of the same listed price by the buyer and seller for trading and investment purposes. Whereas AMM follow a different approach to digital asset trading.
Over the last few years, development in the field of DeFi has been mind-numbing and revolutionary. The innovation in the crypto field concerning finance has gained massive popularity and is set to be an industry. While AMMs have come a long way, they are expensive and difficult to manoeuvre. However, all good things come at a price, and DeFi and AMMs have massive growth potential.
AMM and DeFi
AMMs are unique financial tools that imbibe the aesthetics of crypto, blockchain technology, and Ethereum. It is an entirely decentralised digital trading system. It requires constant innovation to amp the use case for mainstream users and manage risk. But, AMMs allow users to come up with solutions and equally be a part of the decision-making process, as no one entity regulates it. AMMs have played a pivotal role in democratic liquidity provision and driving DeFi, despite the limitations.
DeFi extends complete control to the users regarding their money and how they intend to use it. However, the industry is yet to reach its maximum potential. The traditional finance industry is well-guarded with legacy businesses and might take some time to switch.
What does the entrepreneur need for a flourishing business model or to ensure the proper working of any business? The answer is simple: Liquidity! Liquidity is what gets your engine moving smoothly. Now how decentralised finance will provide liquidity is a genuine concern. DeFi must fix how money advances on the blockchain and simplify token buying, selling, transferring and swapping. DeFi needs to develop a financial system that enables the use of dormant cryptos in users’ wallets as loans, etc.
However, let us not forget that the initial days of the internet were full of hiccups, like difficulty in moving information and expensive and slow. But with time, more than 90% of the world’s population uses the internet for their daily activities. The stir Web 3.0 will create is no longer a far-sighted dream; it is getting real each day.
Vision to Reality!
How can we make DeFi the preferred choice? How can we make DeFi accessible and acceptable? The answer is simple. We need to do everything we did with Web 2.0, with just a little more innovation—which means we need to make Web 3.0 cheaper to increase its market share. The simplicity in using and inexpensiveness of the web will ultimately unlock the creativity of crypto. Thus, enhancing the native use of DeFi in daily activities like sending money to families, purchasing groceries, splitting bills at a restaurant, picking up coffee, and other real-life daily activities for which people use the internet.
AMM technology has walked a long way and has come the closest to turning the vision into reality. It enables users to get rewards for depositing money into liquidity pools, providing an incentive to create more liquidity by depositing cryptocurrency. However, the only hiccup is the expense and the complicated use attached to it. AMM development should focus on increasing ease of use, introducing innovative ways to enhance liquidity, and making the overall experience cheaper.
What fibre lines did for internet speed, the next iteration of AMM will do for DeFi. Meaning it will lead the quality product towards expansion and mass adoption. AMMs are faster alternatives to traditional trading ecosystems. For instance, if a trader wants to trade ETH for USDT, they can send ETH into the liquidity pool with both tokens and receive USDT in return. The pool is regulated by an algorithm that determines the price so that the pool remains balanced. It works on a concept similar to Balance sheets or ledgers, where both sides are worth the same.
The crypto liquidity pools can be funded by anyone holding crypto tokens. Once you fund the liquidity pool, the tokens are locked into it for others to trade. Users gain benefits and rewards in terms of interest on capital invested and the number of trades within the pool. The ability to generate passive income through a liquidity pool is a significant factor that led to the DeFi explosion.
Onwards and Upwards!
Various Decentralized Exchange platforms have quickly established themselves as the primary AMMs for the crypto revolution. New DEXs are being launched daily to explore the potential and optimize the current AMM model. More and more DEXs are gravitating towards creating a great user experience at a lower fee while delivering all the essential features. Development in the field of blockchain is a crucial step for the DeFi process and AMM model evolution. The recent development of DEXs reflects the potential AMM holds and is building a solid bedrock for DeFi in years to come.