What is automated market makers (MMA) in DEX?
Automated Market Makers (AMMs) are a type of decentralized exchange (DEX) mechanism used to facilitate trading of digital assets without the need for traditional order books. In AMM, the exchange rate of tokens is determined by a mathematical algorithm rather than a centralized order book.
AMMs work by utilizing liquidity pools, which are pools of tokens supplied by liquidity providers (LPs). LPs can deposit two different tokens into the pool, typically one is a stablecoin or a popular cryptocurrency such as Ether (ETH) or Wrapped Bitcoin (WBTC), and the other is a newer or less-liquid token that is being listed on the exchange.
The liquidity in the pool enables traders to buy or sell tokens at any time without the need for a buyer or seller to be present. When a trade occurs, the algorithm automatically adjusts the exchange rate of the tokens based on the ratio of the tokens in the pool. This means that the more of one token that is bought or sold, the higher or lower the price of that token becomes relative to the other token in the pool.
AMMs have gained popularity due to their ease of use, as they do not require users to place orders or wait for buyers or sellers. They have also enabled the trading of a wider range of tokens that may not be available on centralized exchanges.
AzurSwap LPs
LP stands for "liquidity provider" in the context of decentralized exchanges (DEXs) and automated market makers (AMMs) like Uniswap, PancakeSwap, and SushiSwap.
In AMMs, liquidity providers deposit pairs of tokens into a smart contract pool, which is used to facilitate trades between those tokens. These liquidity providers are incentivized to deposit funds into the pool by earning a portion of the trading fees generated by the pool. These fees are usually a percentage of the trading volume, and they are split between all the liquidity providers based on their proportional contribution to the pool.
For example, if you deposit equal amounts of ETH and DAI into a liquidity pool, you become an LP and you will receive LP tokens in return. These LP tokens represent your share of the liquidity pool. Whenever someone trades ETH for DAI (or vice versa) on the exchange, the smart contract automatically buys and sells the tokens in the pool to facilitate the trade, and you earn a portion of the trading fee based on your share of the pool.
Overall, being an LP can be a profitable way to earn passive income in cryptocurrency, but it does come with some risks. The price of the tokens in the pool can fluctuate, which can affect the value of your LP tokens. Additionally, there is always the risk of impermanent loss, which occurs when the price ratio between the two tokens in the pool changes over time, causing you to lose some of the value of your deposited tokens. However, despite these risks, LPs continue to provide valuable liquidity to DEXs and AMMs.
LP tokens in swaps are usually ERC-20 tokens that represent a share of the liquidity pool. They are not NFTs. When users provide liquidity to a swap, they receive LP tokens in return. These LP tokens can be held, traded, or redeemed for their share of the underlying assets in the pool at any time. The value of LP tokens is directly tied to the performance of the underlying assets in the pool.
LP tokens allow users to earn a portion of the trading fees generated by the liquidity pool. When a user swaps one token for another in the liquidity pool, they pay a small fee which is divided proportionally among the LPs based on their share of the pool. LP tokens can be used to withdraw the underlying tokens from the pool at any time. The number of LP tokens a user holds determines their share of the pool and therefore their portion of the fees.