AMM model

Since 2020, the explosive growth of decentralized exchanges (DEXs) based on the automated market maker (AMM) model utilizing homogeneous tokens (FT) or, more precisely, constant function market makers (CFMM) represented by Uniswap, has made the AMM model the norm for DEXs. Compared to the central limit order book (CLOB) model mainly used by traditional exchanges, the minimum resource consumption of the AMM model makes it a key system for implementing smart contracts on blockchain. Without AMM, DeFi would not have achieved its current success, but due to impermanent loss, high slippage, and lack of flexibility, it cannot meet the diverse needs of traders and liquidity providers (LPs). Especially in the CFMM model, the greater the market volatility, the greater the impermanent loss risk faced by LPs. Therefore, the AMM model is most suitable for trading pairs that are relatively stable, such as the exchange between stablecoins.