2025-08-30
In traditional finance and early cryptocurrency trading, the model relies on professional market makers or order books to match transactions, which has problems such as insufficient liquidity, high transaction costs, and low efficiency. The emergence of Automated Market Making (AMM) has brought revolutionary breakthroughs to decentralized trading. It automatically sets asset prices and provides liquidity based on algorithms and smart contracts, making trading more efficient and fair. So, what is AMM? How does it work? And what role does it play in the DeFi ecosystem?
AMM is a decentralized trading protocol built on blockchain smart contracts, which automatically provides liquidity for digital asset trading through mathematical algorithms without the participation of traditional market makers. In the AMM mode, the trading parties do not directly match orders, but trade with a liquidity pool. The liquidity pool consists of two or more cryptocurrencies deposited by users. The smart contract automatically calculates the asset trading price based on constant product formulas (such as\ (x * y = k\),\ (x\) and\ (y\) representing the quantity of the two assets,\ (k\) being a constant). When users deposit assets into the pool, they will receive liquidity tokens (LP Tokens) representing their shares. When trading, the algorithm dynamically adjusts the price based on changes in the number of assets to ensure the stability of the pool. This mechanism breaks the dependence of traditional trading on centralized institutions, allowing any user to participate in liquidity supply and trading.
The operation of AMM mainly relies on smart contract execution and algorithm dynamic adjustment. Firstly, users deposit two assets into the liquidity pool in proportion, and after verification by the smart contract, LP Tokens are generated and issued to users. When a transaction occurs, the smart contract calculates the transaction price according to the preset algorithm. For example, in the constant product formula used by Uniswap, if one asset increases, the other asset will decrease proportionally, and the price will change at the same time. The transaction fee generated will be allocated to the liquidity provider according to the proportion of LP Tokens held by the user, motivating users to continuously inject liquidity into the pool. In addition, to cope with the violent fluctuations in market prices, some AMMs introduce oracles to obtain off-chain price data, optimize pricing models, and reduce the risk of unpredictable losses. When HashKey Exchange explores DeFi innovative trading models, it also pays attention to the development of AMM technology, hoping to provide users with a better trading experience with its advantages.
AMM is widely used in the DeFi field, greatly promoting the development of decentralized trading. In decentralized exchanges (DEXs), AMM has become the core trading mechanism. Users can exchange assets at any time, such as on platforms like PancakeSwap, where even small assets can be quickly traded. In liquidity mining, AMM provides the foundation of liquidity pools, and users participate in mining by injecting assets into the pool to obtain profits. In addition, AMM is also used in stablecoin publishing, derivative trading, and other scenarios, such as maintaining the price stability of stablecoins and anchored assets through the AMM mechanism. HashKey Exchange closely follows industry trends, researching how to combine AMM technology with platform business, expanding the breadth and depth of digital asset trading, and creating more value for users. However, when customers engage in AMM-related transactions, they need to pay attention to latent risks such as unpredictable losses and smart contract vulnerabilities, and plan investment strategies reasonably.
What is HashKey Exchange?
HashKey Exchange is one of the first regulated cryptocurrency exchanges in Hong Kong to obtain a license from the Securities and Futures Commission (SFC). It supports fiat currency deposits and trading in Hong Kong dollars (HKD) and US dollars (USD), offering users spot trading services for mainstream digital assets including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT). The platform also provides OTC (over-the-counter) services to meet the needs of large-value asset transactions and fiat currency conversion, ensuring more flexible and private trading. To cater to the asset allocation needs of different investors, HashKey has launched the HashKey Earn channel, offering users fixed-term and demand financial products to achieve stable appreciation of crypto assets. The platform holds ISO 27001 and 27701 security certifications, employs a 98% cold wallet storage mechanism, and incorporates security measures such as two-factor authentication to provide users with a stable and reliable trading environment.
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