The AMM acronym that you see talked about when referencing decentralized exchange platforms labels them as an automated market maker. An automated market maker is essentially a form of decentralized exchange platform. In many ways, it’s what traditional exchanges have turned into. To explain things better, and get to what is a stablecoin AMM we need to take a look at the past.
Decentralized exchanges in the early days came about as a way to help different parties process a transaction. Yes, you could transfer funds to someone’s crypto wallet just with a set account number. In these early stages of the crypto market there really wasn’t a lot of structure to be able to process transactions. What ended up happening is that most of these transactions were a bit confidence-based. As exchanges came about, folks would be able to use the platform as essentially an arbitrator in a transaction. They also allowed users to have more control over the number of tokens that they were transferring.
A Gentleman’s Agreement
In a traditional decentralized exchange what would typically happen is that parties would have to agree upon a price for the commodity that they are exchanging. Particularly if you’re buying ETH or any other cryptocurrency. In traditional exchanges investors looking to buy cryptocurrencies will have to engage in a negotiation to be able to find the seller that was willing to do the deal at a price that was potentially beneficial to both parties. There are certain exchanges where this is still the law of the land.
There are certain pros and cons to this traditional system. The reality is that everyone is looking for a price that suits them best. Essentially trying to make sure that they can reach a deal where they don’t feel cheated on. This means that you have to look for the right seller and the right time. Essentially this made shopping for cryptocurrencies a time-consuming endeavor. In fact, this is a process that companies have taken a part in with fiat currencies for years. The concept is by no means native to crypto assets.
What Stable Coins, and AMMs Bring To The Table
Stablecoins in an AMM is essentially regulated by the platform itself. This means that the exact prices for transactions are automatically generated by the system. Just with that alone, you’re saving a ton of time that you would have to spend on looking for the best rate on a trading platform. Once you’re inside the platform and you’ve turned your money into tokens there are a wide variety of transactions that you can make.
Traditionally cryptocurrencies in general were a great way to transfer large amounts of money. That’s still the case, and with stable coins you can transfer assets that are tied down to the value of the dollar. Something that has gotten a lot more people into this type of money transfers. You can also invest in pools that help regulate the liquidity of the market. In a sense earning dividends from long term holdings. Something that you couldn’t do in Bitcoin for example.