SHIB’s AMM Is More Profitable than Cryptocurrency Speculation? Details of CoinEx AMM!
As the bull market develops, the industry has been embracing different hits, say, the various pet coins. CoinEx didn’t hesitate to list the hot token SHIB, with its annualized AMM rate reaching 5,000%+ that day! So many users are curious: What is exactly CoinEx’s AMM? What’s the source of AMM revenue? What is impermanent loss? How to choose market-making trading pairs? Let’s take a look!
1. Automated Market Making (AMM)
AMM, short for Automated Market Maker, is a trading mechanism launched by CoinEx this February to improve the liquidity of the exchange market, and it is also one of the most influential DeFi innovations at the moment. Users can become market makers by providing funds for the liquidity pool, and thus enjoy dividends of transaction fees from the platform. The platform can also greatly improve market liquidity through this mechanism.
Originated in 2017 and initially practiced by Bancor, AMM surged in Uniswap in 2020. There are four types of AMM models. The most popular one is the “constant product market maker” (CPMM), which is also the model applied by CoinEx. In this model, users need to add two assets in the liquidity pool when trading, and the product of the two asset amounts will remain constant. Take CET/USDT as an example. When the price of CET increases, the number of CET will decrease and USDT will increase. When the price of CET falls, the number of CET will increase and USDT will decrease. (AMM and traders are two sides of a coin. When the price of CET rises, ordinary traders will buy a lot of CET, while the AMM system will automatically sell CET to provide liquidity for the market, and vice versa.)
Everyone knows that the market makers in traditional centralized exchanges are all professional institutions or teams, but AMM resolutely broke this rule so that everyone can deposit their tokens into the liquidity pool as a small market maker to enjoy dividends of transaction fees. All the transaction data in AMM is open and transparent, and everyone can see the total liquidity, 7-day transaction volume and income of transaction fees in the liquidity pool.
2. Revenue of AMM
Dividends of transaction fees
The two assets, after being provided for the liquidity pool, will be automatically traded in the pool, and 60% of the transaction fees paid by all traders will be distributed to all liquidity providers according to the proportion of their contribution to the pool. Moreover, such dividends are calculated on a daily basis. For example, one day the ONES/USDT market generates transaction fees of 1,000 USDT, and if a user has contributed 10% of liquidity to the pool, he or she can get 1,000*60%* 10%=60 USDT as dividends. (For CET trading pairs, in particular, users can enjoy 100% of transaction fees from CoinEx!)
Spreads in market making
Some users ignorant about the market may be willing to pay a price higher than the market price for a certain asset, which constitutes the spread in market making. For example, someone is eager for cash and wants to sell his or her Bitcoins in exchange for USDT. Then he or she may push the price of Bitcoin down so as to close the order faster. In this case, a market maker can exchange USDT for Bitcoin at a lower price.
3. Impermanent loss of AMM
Despite its smooth development, AMM also comes with risks. The most prominent one is the “impermanent loss”, which will occur once the price of assets for market making fluctuates. In other words, impermanent losses are caused by asset price fluctuations in the AMM environment.
The impermanent loss will be common in the early stage of market making or unilateral market, especially when a certain token skyrocketed or plummeted. For example, one of the two assets deposited in the liquidity pool has skyrocketed, and at this time, a user will earn more for holding this token than making a market. On the contrary, The income will be slightly higher than the market-making income. When a certain token plummets, a user will suffer slightly less loss for just holding this token than making a market. To put it bluntly, the impermanent loss refers to the loss when the rise in the total asset value does not outrun the profits from market making, which is an opportunity cost. However, with the accumulation of transaction fees and price fluctuations, the impermanent loss will be gradually wiped out, and users will eventually profit from market making.
4. Choose the trading pair for AMM
- Popular cryptocurrencies with a large transaction volume. The larger the transaction volume of a cryptocurrency, the more transaction fees it will generate.
- The value ratio of the two assets stays stable. Obviously, severe fluctuations in the asset price will result in great impermanent losses.
- Cryptocurrency prices fluctuate frequently. In that case, the likelihood of unilateral market as well as impermanent loss will be reduced, and transaction fees will be frequently incurred.
- Having read all the above, you must have been eager to make a market. Why not try CoinEx’s AMM APP? Just enter the exchange page to provide liquidity for your favorable trading pairs as a market maker. Hurry now!
