DeFi & AMMs
A short primer.
Last updated
A short primer.
Last updated
Decentralized Finance or “DeFi” is an emerging financial technology that utilizes blockchain technology, smart contracts, and cryptocurrencies to provide open, permissionless, and decentralized alternatives to traditional financial intermediaries and services.
What makes DeFi increasingly popular is that it grants users access to complex financial tools and services that were once only available to traditional financial institutions regardless of race, citizenship, or financial status. Another perk of DeFi technology is that it doesn't require users to surrender their personal information or endure lengthy sign-up processes. Just connect your crypto wallet to a DeFi protocol and go!
Dynamic Automated Market Makers (dAMMs) are used to create a more robust market maker that can accommodate changing market conditions by utilizing multiple dynamic variables in its formula. To achieve this, DAMMs use real-time price feeds to automatically adjust the pool price to the market price, thus eliminating arbitragers.
Unlike the first iteration of AMMs where protocols would just keep liquidity in a pool across a wide price spectrum, Concentrated Liquidity Automated Market Makers (clAMMs) can be implemented to concentrate liquidity in a narrower price range where trades are more likely to occur. This results in more efficient use of liquidity as clAMM protocols are able to provide equal or better trades (less slippage!) for users with much less liquidity.
