CoinEx | An Introduction to AMM: Profit from Market Making as a Retail User

Speaking of AMM, we should first introduce the concept of Market Making (MM).

Market making (MM) normally refers to the provision of liquidity and price operations by market makers. These users provide liquidity for a trading platform and other traders through trading activities such as buying or selling assets with their accounts. Through this process, the exchange receives more market liquidity, while market makers earn profits via market making.

However, users often have to record a high monthly trading volume to qualify for market making on a platform. In the meantime, sound market insights and trading strategies are also required. For most exchange users, earning profits as a market maker comes with high thresholds.

That said, how could retail users engage in market making on a trading platform and make a profit while providing liquidity. This is where AMM comes in.

AMM (Automated Market Making) allows retail users to become market makers by injecting funds into the liquidity pool and share the transaction fees charged by the platform. Relying on algorithmic robots, AMM calculates buying and selling prices according to a formula, thereby providing continuous quotes for the market.

AMM is commonly placed into the following categories: Constant Sum Market Makers (CSMM), Constant Mean Market Makers (CMMM), Advanced Mixed Constant Function Market Makers (CFMM), and Constant Product Market Makers (CPMM).

CoinEx launched the AMM function for increased market liquidity back in early 2021. The exchange combines AMM with an order book in terms of the trading mechanism, and the system automatically converts the liquidity pool into an order book. CoinEx uses the CPMM algorithm in AMM, which means that users have to provide two different assets when adding liquidity to the liquidity pool, and the quantity of the two assets will remain a constant product. This approach 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.

In CoinEx’s AMM markets, every trading pair is backed by a liquidity pool that contains two assets and executes the deposit, withdrawal, and trade of the assets. This rule is called the Constant Product Equation: when Asset A is added or sold, Asset B must be removed by a certain ratio to ensure the constant product of the two. By the same token, when Asset A is removed or bought, Asset B must be added by a certain ratio.

The liquidity pool contains the assets used for AMM. Any user can inject funds to provide liquidity and receive transaction fee dividends from the platform. Such dividends will be automatically injected into the liquidity pool, and all the cumulative earnings can be obtained at once when removing liquidity. At the moment, the return rate of all CET-related AMM markets stands at 100%, while that of other AMM markets is 50%.

Of course, the transaction rate of AMM markets differs from that of regular markets. Such markets use an independent rate system. The table below shows the difference in rates between retail users and market makers in normal AMM markets and stablecoin AMM markets.

In the next article, we will introduce the specific advantages of CoinEx’s AMM markets compared to AMM on other platforms. Follow CoinEx to explore investment opportunities one step ahead!