AMM with CoinEx: How Does CEX’s AMM Earn Passive Income for Users
CoinEx has officially launched the AMM feature this February. AMM, short for automated market maker, represents the biggest technical innovation of DEX, one of the three major driving forces of DeFi. It has changed the traditional transaction matching model by order book, and allows all users to be market makers to provide liquidity for the trading market. Both makers and takers can directly interact with the liquidity pool on the chain without waiting for demand. This model can greatly improve transaction efficiency in the volatile crypto market.
A liquidity provider (LP) can also share the transaction fees in the trading market, which could earn him passive income and further improve the utilization of idle assets. AMM is undoubtedly the best choice for long-term investors to cut the cost of capital occupation. In the past, any mention of AMM might remind many people of the connection with DEX. But this year, CoinEx has eliminated this stereotype by integrating AMM to CEX. The combination of AMM and the order book has perfectly improved the liquidity of crypto market and also offered users with another investment option.
CoinEx’s AMM features has been well-received among global users since its launch. Thanks to the annualized return of up to 5,200% in the AMM market of long-tail cryptos and popular cryptos, many users have gained considerable profits at ease. Yet that’s just part of the story.
How to choose a trading market when using the AMM feature? How to solve the issue of impermanent loss? How to calculate the investment yields of AMM? On June 10, 2021 in CoinEx’s official English community, we had Fruit, Product Director at CoinEx, in the AMA event with the theme “How to Earn 1,000+% Annualized Return by Providing Liquidity in CoinEx AMM”, where he shared with us every detail of CoinEx’s AMM feature and answered users’ questions.
Q1: CoinEx has launched a feature called Automated Market Making (AMM) in February 2021, when normal users can provide liquidity to get income. Can you explain to us, what exactly is AMM?
AMM is short for Automated Market Making. The concept originated from 2017 and has grown explosively due to Uniswap in 2020. After launching AMM in February this year, we enable any user to become market makers by depositing assets into the liquidity pool, and share the transaction fee dividends returned by the platform.
CoinEx adopts the algorithm of “Constant Product Market Maker Formula” in AMM. Users need to deposit two kinds of assets while adding liquidity, and the product of the quantity of 2 assets would remain a constant. What’s more, AMM on CoinEx can calculate the buying and selling price according to the formula, so as to provide continuous quotation for the market. In terms of the trading mechanism, CoinEx applies AMM combines with order book so that the assets from liquidity pool will be systematically converted into the order book.
Q2: Would you mind explaining to us the transaction rates and income rules of the AMM on CoinEx?
Before explaining, we should understand that the transaction rates on AMM markets are different from that of the ordinary markets and it adopts an independent rate system, in which VIP members does not enjoy special rates and CET deduction is not available.
The revenues of CoinEx AMM mainly comes from the transaction fee dividends allocated by the platform.
Unlike the market makers of traditional CEX, AMM enables any user to join the liquidity pool and become a market maker, getting 50% of the transaction fee dividends of the market, of which the dividend proportion of all CET markets is 100%;
The income earned in the market making account is calculated once on a daily basis, i.e. the income of today will be allocated automatically into your AMM account on the next day. When the liquidity is withdrawn, the accumulated income can be obtained.
For instance: Let’s assume that a transaction fee of 100 USDT and 400 LBC has been generated in LBT/USDT market on a certain day.
If user Alice has a 10% share in the LBC/USDT liquidity pool, then Alice would get 5 USDT and 20 LBC as transaction fee bonus, calculated as follows:
(1) USDT bonus：100 * 50% * 10% = 5 USDT
(2) LBC bonus：400 * 50% * 10% = 20 LBC
The proportion will lift from 50% to 100% if Alice provides assets to CET/USDT market.
Q3: It is said that the AMM APY of certain markets can reach 1000%+ or higher. Which markets are available for AMM on CoinEx and what’s your suggestion when it comes to choosing AMM markets?
For the moment, there are altogether 119 coins/tokens and 300+ markets available for CoinEx AMM and more on the way. Please click here to learn more about CoinEx AMM, liquidity market value, 7-Day trading value, APY etc: https://www.coinex.com/asset/making
Personally, I have a few suggestions to choose the AMM markets for your references:
(1) For popular trading pairs: The transaction volume of popular currency is huge, with higher transaction fees naturally.
(2) For relatively stable trading pairs: Choosing two trading pairs with little change of asset value ratio can effectively reduce your impermanence loss.
(3) For pairs that fluctuate frequently: On one hand, it can reduce the extreme situation of unilateral market and reduce the risk of impermanence loss; On the other hand, transaction fees are generated frequently to obtain more dividends.
Q4: What are the risks of AMM and how should we avoid them?
Impermanent Loss refers to the loss caused by the fluctuation of external market prices when the liquidity provider provides liquidity (Share/LP) to the capital pool under the operating environment of Automatic Market Making (AMM).
Let me explain that impermanence loss is a kind of loss encountered in the process of automated market making, caused by price deviation. and it may disappear after the asset price recovers.
When a pair of coins/tokens are injected to the liquidity pool, if the price of one side is higher than that of the other, then the total value you get is lower than that of the two tokens when the price rises or falls. And the lower part is your impermanence loss. The greater the price deviation, the greater the impermanence loss.
Let’s list some examples here:
(1) Assume that there are 900 CET and 900 USDT in the fund pool at the moment, and now the price of 1 CET = 1 USDT;
(2) LP (Liquidity Provider) Alice has added 100 CET and 100 USDT into the pool, thus there will be a total of 1,000 USDT and 1,000 CET inside. LP Alice owns 10% of the assets in the pool, and the value of her assets is 200 USDT.
(3) Assuming that trader Lee sold 100 CET and his order was executed in the asset pool. Then according to the rules of CPMM (Constant Product Market Maker), he would get (1000–1,000,000/1100)= 90.909 USDT. Thus, there would then be 1,100 CET and 909.091 USDT left in the fund pool. We can calculate that the price of CET at this time is 0.826 USDT.
(4) Assuming that LP Alice is going to remove the liquidity at this time, since that she owns 10% share in the liquidity pool, she can remove 10%*1,100 CET+ 10%*909.091 USDT in total, that is, 110 CET and 90.9 USDT. The value of 110 CET + 90.9 USDT would be 0.826 * 110 + 90.9 = 181.76 USDT;
(5) At first, the assets that LP Alice owned were worth 200 USDT, and after adding the assets into the pool, her assets become 181.76 USDT, which means that her impermanent loss is 18.24 USDT.
Note: To simplify the calculation, trading fee isn’t considered during the process.
Here’s a chart of estimated Impermanent Loss for your references:
Impermanent loss would be prevalent at the beginning of market making and when the market constantly goes up or goes down. As the obtaining of trading fee and the fluctuation of market price, impermanent loss would gradually disappear and users can gain profit from providing liquidity.
Q5: Now that we have the basic idea of AMM concept, revenues, rates and risks, how do we take part in CoinEx AMM?
Step 1: Visit www.coinex.com via your browser and click [Exchange] on the upper navigator after signing in.
Step 2: Select the AMM market that you wish to add liquidity to, and click [Add] after entering [Liquidity Pool] on the right side of markets.
Step 3: Enter the asset quantity you wish to inject to the pool in the page and click [Add] after confirmation.
And congratulations, your liquidity has been added successfully after following the above procedures.
Q6: If a coin or market that originally supports AMM has been delisted by CoinEx, what will happen?
To provide global users with high-quality investment options, CoinEx regularly conducts one-on-one tracks and reviews on the listed coins/tokens, and will remove those that do not meet the standards.
Kind reminder: Once the coin/token is delisted, its deposit, withdrawal and trading services will no longer be available. Make sure to complete the withdrawal or asset trading before delisting so as to avoid unnecessary property losses.
If a coin/token is no longer available in AMM markets, CoinEx will make an announcement in advance and return all market making assets (including the market making income during the period) to the users’ spot accounts based on their proportion in the liquidity pool at the specified time frame.
Q7: How to calculate the APY of AMM?
At present, CoinEx provides the data of 1-Day and 7-Day APY for each AMM market separately. Users can view it through [AMM Account] — [Asset]. The specific algorithm is as follows:
1-Day APY = The transaction fee income of the latest 1 day * Market making distribution ratio * 365 / Total liquidity market value * 100%
7-Day APY = The transaction fee income of the latest 7 days * Market making distribution ratio / 7 * 365 / Total liquidity market value * 100%
Note: The market making allocation proportion of CET-related markets is 100%, and that of other markets is 50%.
Q8: What are the plans for CoinEx AMM in the future?
A series of optimization and iteration has been carried out on AMM since its launch, including limited interval of AMM function, single market revenue record vs all market revenue record, history curve of assets, MM mining etc.
In the future, CoinEx will keep up with the innovative thinking, come up with more creative product functions that meet the needs of users, and pep up with our user experience, such as supporting the withdrawal of partial liquid assets, sharing market making incomes among different accounts etc.
Meanwhile, CoinEx will give back to the community with more regular market making promotions to encourage more users to participate in AMA while enjoying the benefits.
At present, the first batch of MM Mining on CoinEx is undergoing, where users can provide liquidity for CET/USDT pair and share the Mega reward of up to 5,000,000 CET besides the transaction fee income. And the current APY of the campaign has reached 152.53%.
Click here and join our MM Mining campaign: https://www.coinex.com/activity/mining/amm/10