In this article, we are going to introduce AMM, which has been popular for quite a while. What is AMM exactly? How to earn income from yield farming in the CoinEx AMM market? Here are all the things you need to know.
What Is AMM?
Automated Market Making (AMM) provides continuous quotations for the market.
As we all know, the market maker MM is an entity responsible for adding liquidity to the exchange while making a profit on the bid-ask spread by buying and selling assets in its own account. As their trading activities create liquidity for other traders, the slippage of block transactions has been reduced as a result.
AMM is short for the automated market maker. The CoinEx AMM market is a market in CoinEx that supports automated market making. AMM uses algorithmic robots to simulate the above-mentioned actions in electronic markets such as DeFi. In general, AMM can calculate buying and selling prices according to formulas, thereby providing continuous quotations for the market.
There are several types of AMM:
- Constant Sum Market Maker (CSMM)
- Constant Mean Market Maker (CMMM)
- Constant Function Market Maker (CFMM)
- Constant Product Market Maker (CPMM)
What Is CoinEx AMM?
CoinEx launched automated market making (AMM) in February 2021 to improve the liquidity of the exchange market. It combined AMM with the order book as the trading mechanism so the system can automatically convert the liquidity pool into an order book. In addition, CoinEx uses the “constant product market maker (CPMM) model” algorithm in AMM, which features the ability to provide liquidity for the market regardless of the size of the order book and the liquidity pool.
Speaking of AMM, we need to mention the liquidity pool. So what exactly is a liquidity pool?
The liquidity pool keeps the market-making liquidity in the AMM market. During the transaction, the product of the quantities of the two supplied tokens always remains the same. Users can provide liquidity to obtain returns on the transaction fees from the platform. Each trading pair in the AMM market has a liquidity pool, which keeps the balance of two assets and executes the deposit, withdrawal, and trading rules of these two assets.
Such a rule is called a constant product formula: when one of the assets is deposited or sold, part of the other must be withdrawn to ensure that the product is constant; on the contrary, if an asset is withdrawn or bought, a certain amount of the other asset must be deposited.
How to Earn Income from Yield Farming in CoinEx AMM Market?
CoinEx AMM Features
With three major features, CoinEx AMM market ensures automatic market-making and stable profits:
- Automatic market making to make profits
After a user provides liquidity, the funds will be deposited in the liquidity pool for automatic market making, and 60% of the transaction fee paid by all trading users (100% in the CET/USDT market) will be allocated to all liquidity providers according to the proportion of their shares in the liquidity pool.
- Daily income accumulated to be withdrawn all at once
The income from transaction fees earned in the market-making account is calculated once a day and is automatically deposited into the market-making account. You can get all the cumulative income when removing liquidity.
- Liquidity adding and removal are free of charge
The assets can be transferred between the spot account and the market-making account in real time by adding and removing liquidity, free of charge.
The transaction fee rate and market-making income of the CoinEx AMM market must be a greater concern for many users.
Unlike ordinary markets, CoinEx AMM market applies an independent rate system, where the rates for the maker and the taker are both 0.3%; VIPs and market makers do not enjoy rate discounts, and cannot pay CET for transaction fees. It is worth noting that any user can join the liquidity pool as a market maker and enjoy a share of the transaction fees from the market.
CoinEx AMM Market Trading Pairs
Currently, the CoinEx AMM market supports 168 trading pairs, including CET/USDT, LBC/USDT, AYA/USDT, FCH/USDT, and TRTL/USDT. Refer to the CoinEx official website for a complete whitelist of trading pairs. More trading pairs will be listed, so stay tuned. In the last part, let me introduce you to how the CoinEx AMM market allocates the transaction fees:
CoinEx will allocate 60% of the transaction fees generated in all the supported AMM markets (100% in the case of CET/USDT) on a daily basis according to the proportion of liquidity provided in the liquidity pool. Here are two examples to facilitate your understanding.
Example 1: Suppose a transaction fee of 100 USDT is generated in the LBC/USDT market on a certain day. If a user has a 10% share in the LBC/USDT liquidity pool, he or she can get 100 * 60% * 10% = 6 USDT as rewards from transaction fees.
Example 2: Suppose a transaction fee of 100 USDT is generated in the CET/USDT market on a certain day. If a user has a 10% share in the CET/USDT liquidity pool, he or she can get 100 * 10% = 10 USDT as a reward from transaction fees.
Impermanent Loss
Here is an important tip: the operation comes with risks. The funds in the market-making account will be deposited into the capital pool for automatic market-making. When the price fluctuates, there will be impermanent losses, and the amount of assets may change significantly when liquidity is removed.
By the way, below is something about the impermanent loss.
The impermanent loss refers to the temporary loss of funds that occurs due to the volatility in the price of a particular token in the pool when the liquidity provider supplies his or her tokens to a pool under AMM. The impermanent loss only exists under AMM, and may disappear after the asset price recovers. However, in most cases, as asset prices cannot recover to their original positions, the impermanent loss is actually eternal, giving it another name: differential loss; therefore, in general, the impermanent loss arises from fluctuations in the asset price in the AMM environment.
Last but not the least, users can enjoy 100% of the transaction fee as a reward from the platform for CET/USDT. Now join us to be a market maker!
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