Understanding Automated Market Makers(AMMs) in DeFi

Learn about

What is traditional order book
- Match buyers and sellers based on price and time
- Sufficient liquidity
Challenges with order book on blockchain
- Liquidity Challenge: Maintaining liquidity is difficult in decentralized space, for less popular tokens.
- Technical Limitations of Blockchain: Ethereum have high txn cost, latency
  - order book is less practical, possible in Solana and other faster and cheaper Blockchain
- orders visible to everyone, risk of front-running and MEVs
Why AMMs are great for blockchain(SC)
What is AMM
- vending machine (Liquidity Pools) that automatically sets price
How AMM is different from traditional order book.

Order Book	AMM
Match seller and buyer directly	Users trade against the liquidity pool
Relies on market makers to provide liquidity	Users provide liquidity and earn rewards
Market price is being determined by the market makers	Market price determined by algorithm
User can purchase at their price (limit order)	Limit order is currently being worked upon (CLOB)

How AMM works ?
Types of AMM - Constant product AMM, Constant Sum, Concentrated liquidity, Hybrid AMM
Hybrid (CPMM and CSMM) - curve
What is constant product AMM ? x*y=k , x and y are the quantities/amount of assets (k is constant)
What is limit order, market order and different terminology - slippage and impermanent loss