What is an Automated Market Maker?
Decentralized Finance (DeFi) is booming and has given the Crypto world a much better alternative when it comes to trading and earning passive income. As of currently, data indicates that the Total Market Capitalization for DeFi has reached a staggering $130 Bln.
Before DeFi Exchanges existed, all trades were made on CEXes (centralized exchanges) whereby the exchange has custody over its users’ funds at all times and can suspend trading at its discretion. This led to DeFi enthusiasts coming up with a refined version of DeFi exchanges. Their defining feature is that they do not have custody over the transacting wallets’ funds and enable them to achieve passive income from means other than natural portfolio growth.
Much of the DeFi ecosystem is driven through AMMs where, unlike traditional centralized exchanges, all trades are made against a liquidity pool rather than an orderbook thereby enabling automated trading.
This is made possible by the permissionless and non-custodial capabilities of smart contracts. All of this is made possible without having to rely on any third party buy/sell requests for the tokens trades hence championing automation. Upon initiating trades on AMMs, smart contracts automatically send these tokens to the corresponding liquidity pool and exchange them for the parallel token within the pair.
AMMs determine prices according to an algorithm that sets the prices according to the change in prices of the tokens supplied for liquidity. Liquidity pools are financed by Liquidity Providers or Market Makers who, in turn, are rewarded with a proportion of trading fees as well any staking program (if offered). Anyone can create their own token on an AMM since it is open-sourced so be sure to verify the smart contract (the contract denoting the token) before making any trades.
When depositing funds into a liquidity pool, an equal amount of liquidity needs to be supplied. For example, $10 worth of BNB and $10 worth of USDT would have to be supplied to a BNB/USDT pool on Pancakeswap. Since DeFi is open-sourced, anyone can become a liquidity provider provided they have a Web-3 enabled wallet like Metamask and TrustWallet.
How are Returns in DeFi Calculated
Automated Market Makers incentivize users to become liquidity providers by offering a proportion of each transaction fee and free tokens.
The returns in AMMs are calculated according to the multiplier. Conversely, the higher the multiplier, the higher the APR. Furthermore, returns are dynamic which means that they are calculated according to the amount of liquidity in a particular pool. This has lead many DeFi enthusiasts to be on the lookout for the next major AMM with lucrative APR’s, as the earlier you get in, the more the prospective returns.
Downsides of Automated Market Makers
This model also has certain downsides. A high liquidity pool with a healthy amount of trades thrives and low liquidity pools often suffer from increased price impacts and slippage thereby rendering them ineffective.
Other than that, this also opens the doors towards Impermanent Losses. Such losses are concerned with liquidity pools in DeFi and are occurred when the price deviates by a given % and results in your deposited token values decreasing due to a divergence in the price of the LP tokens. Since AMM’s cannot automatically balance the exchange rates of tokens on their own, this is where arbitrageurs need to step in and create a match between the token prices of the AMM and external markets. The Impermanent losses may be erased when the token prices rebalance to the price one initially staked at hence the term ‘impermanent.’ Similarly, withdrawing from the LP pool at distorted prices can result in permanent losses.
Calculating potential impermanent losses can be a nuisance which is why we’d recommend using Yield Farming Tools. As in the image below, you can adjust the price changes for both sets of token pairs at your discretion and the Yield Tracking Dashboard provides you with the exact % of impermanent losses.
What is Slippage and How Does It Function
Slippage is the deviation of the asset price and the value that is realized after the execution of a trade. It represents the setting for the amount of price slippage a trader is willing to accept. Slippage occurs when the bid/asks spread changes between the time a market order is requested and the time an exchange or other market-maker executes the order.
Having a high slippage can result in your transaction being front-run. Front running occurs where there is a delay between a transaction being submitted in a mempool for approval and its execution time. Similarly, contrary to popular belief, a low slippage can also result in your transaction failing. Therefore, be sure to keep slippage to a feasible extent.
Potluck Protocol — The Spookiest AMMs, Yield Farming and Gamification features
Potluck Protocol is an Automated Market Maker built on the Binance Smart Chain that brings gamification features that are unique to DeFi. We believe that sustainability and remaining deflationary is key hence why we have a predetermined Total Supply of 250M. In order to achieve that we will be doing constant buybacks and burns.
Our yields are ape-worthy and hefty ranging as high as 350% on our BTCB-USDT farm and stable coin pools having an APR of 90%+.
Here’s what we offer:
- The Cave is where you can farm tokens in return for $PTLKX
- The Attic is where you can stake tokens in return for $PTLKX.
- The Bat Box is where you can stake $PTLKX to earn notable tokens within the BSC realm. Our first pool allows you to earn Cake and we intend to offer a different staking program(s) every month.
- The Observatory is meant for non-DeFi projects where you can stake them in return for tokens. Our first collaboration has been with Cryptonovae — many more to come.
- Slasher: Our dice dApp that runs on our native token, $PTLKX.
- Sonar: Our upcoming BNB Binary Bettings Options, more details shared here
- The Batbox: A p2p lottery that allows users to select a character: Bruce or Joker and battle it out among themselves, winner takes 90% with the latter being burned.
- Everyone Eats Funds: To be announced in Q4
We recently went cross-chain on fantom with our native token, $FANG, check us out and take advantage of the lucrative APRs.
For more information, refer to our roadmap.
As always, storm the farm lads!
~Fanties Dude
