Automated Market Maker Explained

Posted by , on April 20, 2019
Guides

How does the Automated Market Maker (AMM) work?

If you look at the image, it shows that the AMM holds 1,661,141.4464 ENU and 4.33300955 BTC. The contract is enu.btc.coin. This means that if you send either BTC or ENU to this contract you will automatically get the other coin. The market maker will act as a counterparty to your trade. If you sell, it will buy. If you buy, it will sell.

The market maker contract treats ENU x BTC to be constant. So if you add ENU to it, it will give you back the BTC in such a way the new ENU x BTC it owns remains constant (after taking 1% fee of course). This means the more you put on one side, the more the price of the other side increases.

Who owns the ENU and the BTC in the AMM?

The answer is the community who holds ENUBTC tokens. If you look at the image, there are 7,295.6066 ENUBTC tokens in circulation. Each ENUBTC is a share of the ENU and the BTC owned by the AMM. If you send ENU or BTC to enubtc.mm, you are basically converting what you send into both ENU and BTC and add it to the AMM and the AMM gives you shares to represent your ownership of the AMM. As more people will trade with the AMM, since there are fees taken, the ENU and BTC it holds will gradually increase, so your ENUBTC shares will also own more and more ENU and BTC. Owning a share of the AMM basically means you are a part owner of all the shares, meaning you own part of ENU and BTC it represents. If someone buys, you sell part of it. If someone sells, you buy part of it. You basically become a participant of each trade and you earn a share of the trading fees.

What is the significance of owning ENUBTC?

Owning ENUBTC means you added both ENU and BTC to the AMM so you add liquidity to the exchange. In the image, it means the AMM has 1.66M  ENU and 4.33 BTC to sell. The more the liquidity grows means less price volatility (it takes more to move the price). The more liquidity in the AMM will mean that big transactions will not move the price so much.

What is the advantage of trading with the AMM?

Trading with the AMM means you get a better deal. We have observed that despite the 1% fees, the AMM still offers the best spread and you will get more if you buy or sell. Also, if you hold ENUBTC shares, you earn back part of the fees you generate and earn part of the fees other trader generates. Since the AMM is community owned and powered by an open source smart contract, everything is transparent and the community earns all the fees. Each ENUBTC owner is like operating his/her own exchange that runs 24/7. If you have ENU or BTC sitting on a wallet and not doing anything, it would be better if you put it in the AMM and let it earn and help build the liquidity of the AMM.

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