All content expressed is purely for educational purposes only. This is not financial advice. Do your own research before investing or trading.
AMMs, or Automated Market Makers were first created in the early 1990s to increase liquidity to markets and prevent market manipulation by market makers.
The first “true decentralised AMM” emerged on the scene with the launch of Uniswap in late 2018. While many newcomers to the crypto space are intimidated by the perceived complexity of crypto, the simplistic nature of AMMs have been a strong driving force behind its popularity when it comes to earning yield and could hopefully encourage “no-coiners” to finally invest in their first crypto assets.
For those who don’t know what AMMs are, or need a recap, AMMs are an important tool that decentralized exchanges, or DEXes use to provide liquidity to the exchange. Traditional centralised exchanges on the other hand would be provided with this liquidity from enormous financial institutions such as banks.
This is why they are considered “market makers” because they are the ones who are able to make the trades between buyers and sellers happen. The banks would then profit off of the exchange fees.
This is an extremely lucrative way to earn capital. Unfortunately for the rest of us, we don’t have the luxury of participating in such investments, as most of us don’t have billions of dollars lying around. DEXes realised they could generate enormous amounts of liquidity by providing the option for the retail investor to earn passive income by allowing them to participate in the market making process.
One beneficial consequence of AMMs would be to create a truly decentralized financial market that is run by a decentralized and autonomous group of individuals. This would create a viable alternative to the heavily controlled, corrupted, and manipulated traditional financial system that we currently have.
CoinFLEX understands that the future of finance is decentralised and is making its shift towards decentralization – one example being decentralizing custody and clearing of user assets.
This means you have complete control over when you withdraw funds, where you send it to, who you send it to, how much you withdraw, and why you want to withdraw your assets. This is a refreshing comparison to traditional banks, who interrogate you for simple things like sending money to family overseas or making a purchase with your card that’s not familiar to their tracking system.
CoinFLEX is the first centralised exchange to provide an AMM for their users with it’s product, AMM+. Having both a centralized orderbook as well as an AMM will result in CoinFLEX becoming the largest exchange by liquidity.
The ability to use leverage, thanks to it being connected to the perpetual futures market, and the ability to choose your price range, has allowed users to earn triple and even quadruple digit APRs. Earning these APRs however can be quite tricky. To do so you need to use leverage, which puts you at risk of liquidation, and more importantly you need to figure out where to set your price range.
How to Choose Your Range
Where you set your price range is determined by a number of factors, such as the direction you believe the price is heading, the volatility of the market, or the amount of leverage you want to use, for example.
By selecting the direction, you are essentially making a decision on what strategy you think will be the most profitable in the current market conditions. As such, it refers to where you think the market price is heading.
If you think the price of your asset will increase, you may want to click ‘Buy’, as it is ideal for upward trending markets and accumulating long positions.
If you think the price of your asset will decrease, you may want to click ‘Sell’, as it is ideal for downward trending markets and accumulating short positions.
If you want to take advantage of both directions, or you think the price will consolidate for a set period of time without breaking out in one direction, you may want to choose ‘Neutral.’ You will need to deposit both assets in the trading pair if you select the neutral option.
Maximum/Minimum Price Ranges vs Market Price
The way your fees are calculated also depends on where your maximum and minimum prices for your range are in relation to the current market price. If you are in a ‘Buy’ position, and your maximum price is above the market price from the time you enter the position, AMM+ will buy long positions evenly along the orderbook’s buy positions but sell at the first sell position on the orderbook.
If you are in a ‘Sell’ position, and your minimum price is below the market price from the time you enter the position, AMM+ will sell positions evenly along the orderbook’s sell positions but buy at the first buy position on the orderbook.
When deciding a range, it’s important to understand what impermanent loss is and how it can result in you not making as much as you would have if you held, or worse it can result in you losing money.
Impermanent loss is the price difference between just holding your tokens on a wallet versus having it staked as a liquidity provider (LP) in an AMM. Impermanent loss can occur even if your crypto asset increases in value.
For ‘Buy’ if you do not redeem your position at the your entry price or a higher price, you will experience impermanent loss, also known as divergent loss. It therefore may not be a good idea to execute ‘Buy’ positions if you believe the price of the asset will decrease.
For ‘Sell’ positions you will experience impermanent loss if you do not redeem your position at your entry price or lower. It therefore may not be a good idea to execute ‘Sell’ positions if you believe the price of the asset will increase.
For ‘Neutral’ positions, you will experience impermanent loss if you do not redeem your position at the mid price between your max and min range.
You can also counter impermanent loss however if you have earned enough fees to offset the drawdown created by price movement.
The size of your price range will also determine how much you earn off of fees. If you enter a wide price range, your liquidity won’t be as concentrated and therefore less efficient so you won’t be earning as many trading fees if you had a narrower price range.
Remember, if you set your price range too narrow with leverage, and the price of your asset goes outside your range or against your position direction, you will be liquidated.
À propos de Coinflex
Founded in 2019, CoinFLEX is the Home of Crypto Yields and is committed to providing institutional and retail investors an easily accessible platform to earn and trade crypto.
CoinFLEX creates innovative solutions to bring investors and crypto markets together through intuitive yield products such as flexUSD, the world’s first interest-earning stablecoin, and AMM+, the most-capital efficient automated market maker in the world. CoinFLEX is backed by crypto heavyweights, including Roger Ver, Mike Komaransky, Polychain Capital, and Dragonfly Capital.
Author: Adam Diaz