1/ Liquidity providers (LPs) add funds to liquidity pools.
You could think of a liquidity pool as a big pile of funds that traders can trade against. 2/ In return for providing liquidity to the protocol, LPs earn fees from the trades that happen in their pool.
In the case of Uniswap, LPs deposit an equivalent value of two tokens – for example, 50% ETH and 50% DAI to the ETH/DAI pool. #aelfDeFi#DeFi#aelf
Oct 22, 2020 • 4 tweets • 1 min read
#aelfQA 1/ How does an automated market maker (AMM) work?
An AMM works similarly to an order book exchange in that there are trading pairs – for example, ETH/DAI.
However, you don’t need to have a counterparty (another trader) on the other side to make a trade. 2/ Instead, you interact with a smart contract that “makes” the market for you.
There’s no need for counterparties in the traditional sense, as trades happen between users and contracts.
Since there’s no order book, there are also no order types on an AMM.