Market Maker & Automated Market Maker

This article was first published on Stories by ælf on Medium
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AESwap, one of aelf’s most important DeFi products. At the moment, any community member can try out this product using ELF test tokens.

Many of you know how popular DeFi is, but you might not be familiar with the actual DeFi projects. For example, we see lots of “swaps” in this field, including Uniswap, JustSwap, SushiSwap, etc. In this article, we will briefly introduce this type of “swap” to give you a basic understanding of what DeFi really is.

Essentially, these “swaps” are called automated market maker(AMM), if you trade stocks, you must be quite familiar with “market maker”. But for those of you who don’t or seldom trade stocks or tokens, a short explanation is in order.

In finance, market maker is a firm or individual who are often brokerage houses, such as exchanges, actively quoting two-sided markets in a security, providing bids and offers (known as asks) along with the market size of each. They buy stocks of some companies, and quote the price for selling and buying the stocks, that is, they have an ask (they will sell), and a bid (they will buy). For example, suppose Company A’s ask is $10 per share and the bid is $9 per share, this is because the exchange needs to profit from the $1 difference, which is also called the bid-ask spread. If a new trader wants to buy Company A’s stocks on this exchange, he has to buy at $10, vise versa, if he wants to sell, he has to sell at $9.

In this example, he buys Company A’s stocks at $10 per share, which is the current price, that is, the latest price they are traded. Moreover, just like the exchange, anyone can set his own bid and ask. Suppose there is Company A’s stocks have a huge trading volume, ...

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Stories by ælf on Medium

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