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What is an AMM and how is it different to a traditional exchange?

The AMM or an Automated Market Maker is an alternative to the traditional orderbook-based asset trading model. Instead of pairing up buyers and sellers, tokens are bought and sold at a rate determined by an automated demand and supply-based bonding curve. 

With this mechanism, as tokens are purchased, the price goes up. As tokens are sold, the price goes down. In both cases, the exchange rate is determined by a supply curve instead of a market of orders placed by buyers and sellers.

Trading with an AMM is notably different from traditional centralized exchange because trades can still be executed in low liquidity conditions. As long as there is some supply of either token a trade will execute, the price may not be preferable but it will still execute. This is different from a system where orders from buyers and sellers need to be matched up and makes AMMs an excellent market for new tokens, and bootstrapping growth. 

On the back end liquidity provision is also idiosyncratic. With AMM Liquidity is provided by users who contribute funds to liquidity pools. These liquidity providers earn trading fees based on the volume of trades executed using the pool. AMMs automatically adjust prices based on the ratio of assets in the pool, ensuring continuous liquidity for trading.

Still need help? Check out our knowledgebase, ask one of our helpful community members on the Stabull Discord, or submit a ticket via our helpdesk to our team for help.

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