What is AMM (Automated Market Maker) and what is the difference with CLMM (Concentrated Liquidity Market Makers)

Decentralized finance, also known as DeFi, has been a revolutionary technology and remains the bedrock of liquidity, innovation, and eases transactions carried out on the blockchain without the interference of a third-party traditional financial system.

DeFi aims to democratize the traditional financial system by replacing it with peer-to-peer trading that can provide better and open financial services from the traditional banking systems, loans and mortgages, complicated contracts, to a high yield dual investments and and open-sourced kind of trading between individuals and traders with the help of smart contracts.

Today’s traditional banking system, including lending, borrowing, and trading, are managed by centralized systems making it challenging for regular users as they have to deal with tough banking contracts and intermediaries before they can access loans and mortgages to trading of bonds and stocks.

Decentralized finance (DeFi) has made trading cryptocurrency assets easier for individual traders by introducing technologies such as Automated Market Maker (AMM) and the concentrated liquidity market marker to solve some of the problems traditional banking systems still need to offer a solution to.

In this article, we will expand on the knowledge of Automated market makers (AMMs) and concentrated liquidity market makers (CLMMs), differences between AMM and CLMM, advantages and disadvantages of CLMM over AMM, and why ReHold leverages on CLMM to provide the best dual investment for its users.

What Is Automated Market Maker (AMM) And AMM Working Mechanism

Automated market makers (AMMs) are a decentralized exchange that provides liquidity for users using different liquidity pools to enable users to trade different token pairs at infinite prices or enable token swaps. Liquidity provision in decentralized finance is a key component of DeFi that sets it apart from different exchanges. AMMs provide as many users as possible with high liquidity, minimal transaction costs, and 100% uptime.

AMMs use smart contract algorithms to price assets in liquidity pools, enabling unstoppable, automated, decentralized trading through crowdsource liquidity.

Many market makers in AMM are tasked with providing liquidity to enable seamless trading activity between traders as these market makers profit from spreads and transaction fees.

How Do AMMs Work?

An Automated market maker (AMM) is much similar to an order book used in centralized exchanges where cryptocurrency tokens are traded but, in this case, is automated by smart contracts where a user interacts directly with different prices in the liquidity pools.

AMM trading system eliminates the need for a counterparty as users interact with smart contracts at different prices to buy and sell their tokens, where liquidity providers earn returns through trading fees. Liquidity providers and liquidity pools are huge components of the AMM system of trading and DeFi protocols.

The most popular AMMs include Uniswap, Balancer, Pancakeswap, and Curve.

Liquidity Pools:

Liquidity pools are crowdsourced collections of crypto assets that the AMM uses to trade with people buying or selling one of these assets with the help of smart contract algorithms.

Liquidity Providers:

Liquidity providers refer to users that deposit cryptocurrency assets to different liquidity pools for cryptocurrency trading on decentralized exchanges. Yield farming is the act of depositing cryptocurrency assets for trading in a liquidity pool to earn rewards.

Liquidity provision on decentralized exchanges can never be underestimated. This solves problems such as capital inefficiency and impermanent loss, affecting many decentralized exchanges that utilize the AMM model. In a situation of lack of liquidity, this could impact the prices of assets leading to impermanent losses in many cases.

Automated market makers have been instrumental to the DeFi ecosystem and have their advantages and disadvantages.

Advantages of AMMs

The following are the advantages of Automated market makers:

• There is no custody of assets as traders and liquidity providers can access their tokens from their crypto wallets
• AMMs system provides decentralized exchanges with deep liquidity for easy buying and selling of assets
• AMMs offer low trading fees to traders
• AMMs are highly automated with smart contract algorithms making it unnecessary to use an order book for trading

Disadvantages Of AMMs

There are drawdowns associated with AMMs despite their impact in the DeFi space; here are few:

• AMMs are exposed to price slippages and impermanent losses as a result of low liquidity for traders
• AMMs are automated and thereby exploited when there are bugs associated with smart contracts
• Less efficient order execution when compared to centralized exchanges

In order to work on the limitations of AMMs, the idea of concentrated liquidity market makers (CLMM) was birthed, which has gained much attention in recent times as this is adopted by Uniswap V3 and ReHold protocol leverages on the opportunities provided by CLMMs to offer better dual investment strategies for its users.

What Is Concentrated Liquidity Market Makers

Concentrated liquidity market maker (CLMM) is a new liquidity pool that has continued to gain much attention as it ensures liquidity is focused within a price range to maximize capital and provide better yield returns.

CLMMs aim to provide a better solution to problems faced by AMMs resulting in a proper strategy to avoid impermanent losses through price adjustments, reducing slippages, and allowing liquidity providers to earn more as they could charge higher trading fees.

Higher slippages in the past have been associated with AMMs due to market volatility, but with concentrated liquidity market makers, liquidity providers have individualized price curves, better management of capital, and liquidity efficiency for traders are improved. Let us discuss the advantages and disadvantages of CLMMs:

Advantages of CLMMs

• Concentrated liquidity market makers (CLMMs) provide opportunities for better spreads and deeper liquidity as liquidity are concentrated at certain price points
• Concentrated liquidity market makers provide liquidity providers the opportunity for individualized price curves as liquidity is concentrated at certain prices
• CLMMs give the opportunity to better trading fees with a price range

To earn more in CLMM as a liquidity provider, it is important to be an active participant, as this requires price-adjustment processes if you are to earn more when trading with a concentrated liquidity price point.

ReHold protocol leverages on a popular CLMMs which includes Uniswap V3, QuickSwap, PancakeSwap, and KyberSwap, as it uses their concentrated liquidity to aggregate the best prices for traders and offers better dual investment plans to help users earn up to 220% APR in both bull and bear market conditions with proper strategies in place for both beginners and pro traders.

With the help of concentrated liquidity from different DEXs ( Uniswap V3, QuickSwap, PancakeSwap, etc), ReHold’s innovative algorithm enables traders to create precise price ranges to trade within 12hrs to 24hrs while earning up to 220% APR on their various dual investment plans.

Differences Between AMMs and CLMMs

Concentrated liquidity market maker (CLMMs) continues to out-shines the automated market makers as it aims to improve capital efficiency and provide better yield opportunities for liquidity providers.

However, traditional AMMs feature an ineffective token allocation scheme that distributes liquidity evenly across prices that are now active and those that are not. This AMMs working mechanism results in significant slippage and low capital efficiency for liquidity providers whose tokens are used to enable these swaps.

ReHold’s App is a good use case for better earning and strategy for different market conditions, as its CLMMs model outweighs the traditional AMM mechanism in a decentralized trading system. Here are important reasons why you should use ReHold to earn as high as 220% APR.

Why Trade On ReHold App?

• ReHold leverages CLMMs of different DEXs to enable traders to earn up to 220% APR
• ReHold is made up of top professionals with years of experience in the crypto space
• ReHold has designed a strategy that works for both beginners and pro traders to earn in different market conditions
• Peckshield Inc, a well-known auditing company in the crypto space, has audited ReHold
• ReHold has built partnerships with reputable projects such as Polygon, Chainstack, Unstoppable domains, Avvy domain, Fantom foundation to help contribute to the growth of DeFi

Conclusion

The automated market makers (AMMs) mechanism enables traders to swap tokens as smart contracts facilitate the buying and selling of cryptocurrency assets without an intermediary. Liquidity providers and liquidity pools are important components of the AMMs mechanism and how it works.

Due to market volatility and price fluctuations of assets that come with impermanent losses and slippages, many liquidity providers often prefer the use of concentrated liquidity market makers (CLMMs) as it provides better capital efficiency, improves yields as a result of active management of liquidity within specific price ranges.

ReHold App has leveraged the opportunities in concentrated liquidity to provide users with trading dual investments at an APR of 220% within a short period. It provides users with a better strategy to earn in different market conditions.