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Decentralized exchanges (DEXs) and liquidity providers have been at the forefront of the decentralized finance (DeFi) industry and its adoption by the crypto mainstream. The most standard model for these protocols is based on swap-pair pools with two tokens. Balancer (BAL) is a unique protocol that has moved to an innovative model of crypto swaps and pools by hosting pools with multi-token support. In this article, we cover this leading DeFi protocol in-depth.
The Automated Market Maker (AMM) is a model of trading used by DEXs that has been lauded as a more efficient trading system than the order book model. The order book trading system matches buyers and sellers of assets, in this case, cryptocurrencies. If there is no suitable seller or buyer for your order, you might have to wait for some time. This introduces an element of inefficiency into the whole trading process.
Under the AMM model, market players called liquidity providers add the necessary funds to swap-pair pools, incentivized by a share of the revenues from the trading fees in the pool. This ensures that each swap pair has enough liquidity to meet the demands of traders. The traders, both sellers and buyers, then transact with the swap pool instead of dealing with another trader.
The AMM trading model has been a massive improvement over the order book system. It has underpinned the operations of many of the leading DEXs, such as Uniswap (UNI), Curve (CRV), SushiSwap (SUSHI), PancakeSwap (CAKE) and more. In its standard form, the AMM model is based on liquidity pools funded by a pair of cryptocurrencies.