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FAQs for AMM Liquidity Pool
Gate.io
Updated at:115 days 2 hours ago

1. What is AMM (Automated Market Making)?

The use of algorithmic robots to simulate trading behaviour and provide liquidity to the market is known as AMM, Automated Market Making. Gate.io's AMM calculates transaction prices based on the Constant Product Market Maker Model (x*y=k) and thus provides continuous quotes to the market.

2. What is AMM Liquidity Pool?

Each market that supports AMM has a corresponding pool of funds, and the AMM financial pool will provide funds for automated market making. In the transactions, the product of the number of both assets in this market pool will remain unchanged. Users can become market makers by providing liquidity to the pool and receive a percentage of the pool's automated market-making fees. When adding liquidity, users should add both currencies simultaneously in proportion. When users redeem, the liquid assets will be converted into both currencies and returned simultaneously.

3. What is impermanent loss?

Impermanent loss is the loss of capital due to the spread caused by the price change of a digital asset after an investor has deposited it into an AMM liquidity pool. No matter what direction the price of a digital asset moves, it will generate a loss, and the greater the deviation, the greater the loss.

For example,

1) Assuming the GT/USDT pool has 9 GTs and 900 USDTs, where 1 GT = 100 USDT and total liquidity is 1800 USD.

2) User A provides 1 GT and 100 USDT to the GT/USDT pool, then the pool has 10 GT and 1000 USDT. The value of liquidity held by User A is 200 USD and the share is 10%; the total liquidity of the pool is 2000 USD at this point.

3) If the price of GT rises to 400 USDT, and trader B buys GT and injects USDT into the pool, even though the product of the number of the two coins in the pool remains unchanged, the ratio of GT to USDT in the pool has changed. As a result of trader B's transaction, there are now 5 GTs and 2000 USDT in the pool.

4) At this point User A decides to redeem all the funds. His share is 10%, so he can redeem 0.5 GTs and 200 USDT for a total value of 400 USD. If User A chooses to hold 1 GT and 100 USDT all the time, the total value of the assets will reach 500 USD, and instead, he can get a higher return, which is what we call an impermanent loss.

The process mentioned above has ignored transaction fees for the convenience of calculations

4. What are the benefits of providing liquidity?

By adding liquidity, funds are injected into the pool and the fee income earned from AMM in the pool is allocated to the liquidity provider in proportion to the share of the pool. Liquidity can be accessed in real time without any commission charges.

5.How to add liquidity?

Users can switch to the [My Liquidity] panel on the right side of the spot trading area, click [Add], enter the number of currencies in the [Add Liquidity] panel and confirm and click [Add to]. The deposited liquid assets will be transferred from the spot account to the AMM account.

6. How to unlock the liquidity?

Users can switch to the [My Liquidity] panel on the right side of the spot trading area and click [Unlock]. In the [Unlock] panel, users can drag the slider to unlock liquidity by percentage. The unlocked liquid assets will be converted to the corresponding currency and returned to the spot account.

7. How to view liquidity addition and unlocking records?

Switch to the [My Liquidity] panel from the right side of the spot trading area and click on [Liquidity Provision Records] or click on the [Liquidity Provision Records] panel via Wallet - Financial Account - Liquidity Mining to view liquidity addition and unlocking records.

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