What is Automated Market Maker (AMM)?

Maciej Zieliński

07 Oct 2021
What is Automated Market Maker (AMM)?

Forget order books, the future of Decentralized Exchanges lies in Automated Market Makers. Automated Market Maker AMM enables traders to earn shares of transactions in exchange for becoming liquidity providers. What does it mean for DEXs? 

In this article you will learn:

  • What are Automated Market Makers?
  • How does Automated Market Maker work?
  • AMM vs On-chain / Off-chain order book 
  • How to implement liquidity pools into your DEXs
  • Why are Automated Makers so important for the whole DeFi ecosystem?

Automated Market Makers were first introduced to the public with the release of Uniswap in 2018. 

Essentially, they are autonomous trading machines that replace traditional order books with liquidity pools run by algorithms. 

What are Automated Market Makers?

As we mentioned in one of our previous articles, a decentralized exchange can handle trading in three ways:

  • On-chain order book
  • Off-chain order book
  • Automated Market Maker AMM

The last one is undoubtedly the most efficient. That's why the vast majority of modern decentralized exchanges are based on it.

Definition:

Automated Market Maker AMM is a decentralized exchange protocol that relies on smart contracts to set the price of digital assets and provide liquidity.

Cryptocurrency assets are priced according to a pricing algorithm and mathematical formula, instead of the order book that is used by traditional exchanges.

The mathematical formula varies from protocol to protocol. Uniswap, for example, uses the following formula:

a * b = k

Where 'a' and 'b' are the number of tokens traded in the liquidity pool. Since 'k' is constant, the  total liquidity of the pool must always remain the same. Different AMMS use various formulas. However, all of them set the price algorithmically. 

What's important, Automated Market Makers allow almost anyone create a market using blockchain technology.

How Automated Market Makers work?

For trading pairs, for example, BTC/ETH, Automated Market Makers work similarly to order books, which are based on buy and sell orders. However, a vital difference is that a trading pair isn't needed to make a trade. Alternatively, users can interact with a smart contract that will constitute the other side of the trading pair for them. This is what the term “automated market-making” refers to. 

P2P and P2C

You are probably familiar with the term “peer-to-peer transactions,” which is crucial to understanding decentralized exchanges. Every transaction that runs between two users without any intermediary can be called P2P. 

We can think about Automated Market Makers as peer-to-contract solutions because trades take place between users and a smart contract. 

Liquidity pools

Trading pairs, which you know from Centralized Exchange and Decentralized Exchange using order books, are an individual liquidity pool in Automated Market Maker. Therefore, users are essentially trading funds with liquidity pools, rather than with other users. 

If you want to trade two tokens, for example, sell BNB for Ether, you need to find the BNB/ETH liquidity pool. 

We can imagine a liquidity pool as a large pile of assets. But where do they come from?

Liquidity providers 

The answer might sound quite surprising: funds are added to liquidity pools by the users of the exchange. Or, more precisely, liquidity providers.

In exchange for providing liquidity, liquidity providers earn fees on transactions in their pool. Unlike traditional market making with professional market makers, here anyone can become one. 

Profits for liquidity

To become a liquidity provider you need to deposit both assets represented in the pool. Adding funds to the liquidity pool is not difficult and rewards are worth considering. The profits of liquidity providers differ depending on the platform. For instance, on Uniswap 0,3% of every transaction goes to liquidity providers.

Slippage on Automated Market Makers

Different Automated Market Makers may encounter different issues. Yet the risk of slippage is something we should always keep in mind while planning our own DEX. 

Why does it occur?

As I mentioned earlier, asset pricing is determined by an algorithm and a mathematical formula. We can say that it's determined by the ratio between the assets in the liquidity pool. Or more specifically, it is the change in this ratio that occurs after a trade. The larger the transaction, the wider the margin of change, and the greater the amount of slippage. 

Indeed, when a large order is placed in AMMs and a sizable amount of coin is removed or added to a liquidity pool, it can even cause a notable difference between the market price and the pool price. 

More liquidity = less slippage 

In the Automated Market Maker model, more liquidity means less slippage that large orders may incur. Ultimately, this may attract more volume to your DEX. That's why if you want to use Automated Market Maker on your platform, you need to have a solid strategy for encouraging your users to deposit funds in liquidity pools.

You need to remember that to stay competitive in the decentralized finance market, you should offer liquidity of at least a sufficient level. 

Generally, exchanges decide on sharing profits generated by trading fees with liquidity providers. In some cases (e. g. Uniswap), all the fees go to liquidity providers. If a user's deposit represents 5% of the assets locked in a pool, they will receive an equivalent of 5% of that pool’s accrued trading fees. The profit will be paid out in liquidity provider tokens. When users want to leave the pool, they simply exchange their tokens for their share of transaction fees. 

Yield Farming

Yield farming is one of the most important opportunities that can attract new users to your DEX platform. How does it work? What does it even mean? 

LP tokens

We often say that liquidity has a pivotal value in the DeFi space. Creating tokens that are awarded in exchange for providing liquidity is a great idea to increase it. 

Normally when a token is staked or deposited somehow, it cannot be used or traded, which decreases liquidity in the whole system. In the case of Automated Market Makers, implementing easily convertible liquidity provider tokens solves the problem of locked liquidity. Their mechanism is simple: users get them as proof of owing tokens that they have deposited. 

With LP tokens, each token can be used multiple times, despite being invested in one of the liquidity pools. Additionally, we can say that LP tokens open up a new, indirect form of staking. This means that instead of staking tokens themselves we just prove that we own them. 

What is Yield Farming? 

Yes, on multiple exchanges users can stake their LP tokens and profit from them. Essentially, this is what we call yield farming. The main idea behind it is to maximize profits by moving tokens in and out of different DeFi protocols.

How does it work on DEXs? 

Actually, from the user perspective it's quite simple:

  • deposit assets into a liquidity pool 
  • collect LP tokens
  • deposit or stake LP tokens into a separate lending protocol
  • earn profit from both protocols 

Note: You must exchange your LP tokens to withdraw your shares from the initial liquidity pool.

What is impermanent loss?

Impermanent loss occurs when the price ratio of two assets changes after traders deposit them in the pool. The higher the shift in price, the more significant the impermanent loss. Impermanent loss mostly affects liquidity pools with highly volatile assets. 

However, this loss is impermanent: there is a probability that the price ratio will revert. Permanent losses can only occur if liquidity providers withdraw their digital assets before the price ratio reverts. 

Conclusion 

Of all the solutions that we can currently observe on decentralized exchanges, the Automated Market Maker offers the highest liquidity. Today most DEXs are running on AMM or plan to implement it in the nearest future. That's why Automated Market Maker has crucial importance for the DeFi ecosystem.Do you want to know how to apply Automated Market Maker in your project? Don't hesitate to ask our specialists for a free consultation.

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AI in Real Estate: How Does It Support the Housing Market?

Miłosz Mach

18 Mar 2025
AI in Real Estate: How Does It Support the Housing Market?

The digital transformation is reshaping numerous sectors of the economy, and real estate is no exception. By 2025, AI will no longer be a mere gadget but a powerful tool that facilitates customer interactions, streamlines decision-making processes, and optimizes sales operations. Simultaneously, blockchain technology ensures security, transparency, and scalability in transactions. With this article, we launch a series of publications exploring AI in business, focusing today on the application of artificial intelligence within the real estate industry.

AI vs. Tradition: Key Implementations of AI in Real Estate

Designing, selling, and managing properties—traditional methods are increasingly giving way to data-driven decision-making.

Breakthroughs in Customer Service

AI-powered chatbots and virtual assistants are revolutionizing how companies interact with their customers. These tools handle hundreds of inquiries simultaneously, personalize offers, and guide clients through the purchasing process. Implementing AI agents can lead to higher-quality leads for developers and automate responses to most standard customer queries. However, technical challenges in deploying such systems include:

  • Integration with existing real estate databases: Chatbots must have access to up-to-date listings, prices, and availability.
  • Personalization of communication: Systems must adapt their interactions to individual customer needs.
  • Management of industry-specific knowledge: Chatbots require specialized expertise about local real estate markets.

Advanced Data Analysis

Cognitive AI systems utilize deep learning to analyze complex relationships within the real estate market, such as macroeconomic trends, local zoning plans, and user behavior on social media platforms. Deploying such solutions necessitates:

  • Collecting high-quality historical data.
  • Building infrastructure for real-time data processing.
  • Developing appropriate machine learning models.
  • Continuously monitoring and updating models based on new data.

Intelligent Design

Generative artificial intelligence is revolutionizing architectural design. These advanced algorithms can produce dozens of building design variants that account for site constraints, legal requirements, energy efficiency considerations, and aesthetic preferences.

Optimizing Building Energy Efficiency

Smart building management systems (BMS) leverage AI to optimize energy consumption while maintaining resident comfort. Reinforcement learning algorithms analyze data from temperature, humidity, and air quality sensors to adjust heating, cooling, and ventilation parameters effectively.

Integration of AI with Blockchain in Real Estate

The convergence of AI with blockchain technology opens up new possibilities for the real estate sector. Blockchain is a distributed database where information is stored in immutable "blocks." It ensures transaction security and data transparency while AI analyzes these data points to derive actionable insights. In practice, this means that ownership histories, all transactions, and property modifications are recorded in an unalterable format, with AI aiding in interpreting these records and informing decision-making processes.

AI has the potential to bring significant value to the real estate sector—estimated between $110 billion and $180 billion by experts at McKinsey & Company.

Key development directions over the coming years include:

  • Autonomous negotiation systems: AI agents equipped with game theory strategies capable of conducting complex negotiations.
  • AI in urban planning: Algorithms designed to plan city development and optimize spatial allocation.
  • Property tokenization: Leveraging blockchain technology to divide properties into digital tokens that enable fractional investment opportunities.

Conclusion

For companies today, the question is no longer "if" but "how" to implement AI to maximize benefits and enhance competitiveness. A strategic approach begins with identifying specific business challenges followed by selecting appropriate technologies.

What values could AI potentially bring to your organization?
  • Reduction of operational costs through automation
  • Enhanced customer experience and shorter transaction times
  • Increased accuracy in forecasts and valuations, minimizing business risks
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Want to implement AI in your real estate business?

Nextrope specializes in implementing AI and blockchain solutions tailored to specific business needs. Our expertise allows us to:

  • Create intelligent chatbots that serve customers 24/7
  • Implement analytical systems for property valuation
  • Build secure blockchain solutions for real estate transactions
Schedule a free consultation

Or check out other articles from the "AI in Business" series

AI-Driven Frontend Automation: Elevating Developer Productivity to New Heights

Gracjan Prusik

11 Mar 2025
AI-Driven Frontend Automation: Elevating Developer Productivity to New Heights

AI Revolution in the Frontend Developer's Workshop

In today's world, programming without AI support means giving up a powerful tool that radically increases a developer's productivity and efficiency. For the modern developer, AI in frontend automation is not just a curiosity, but a key tool that enhances productivity. From automatically generating components, to refactoring, and testing – AI tools are fundamentally changing our daily work, allowing us to focus on the creative aspects of programming instead of the tedious task of writing repetitive code. In this article, I will show how these tools are most commonly used to work faster, smarter, and with greater satisfaction.

This post kicks off a series dedicated to the use of AI in frontend automation, where we will analyze and discuss specific tools, techniques, and practical use cases of AI that help developers in their everyday tasks.

AI in Frontend Automation – How It Helps with Code Refactoring

One of the most common uses of AI is improving code quality and finding errors. These tools can analyze code and suggest optimizations. As a result, we will be able to write code much faster and significantly reduce the risk of human error.

How AI Saves Us from Frustrating Bugs

Imagine this situation: you spend hours debugging an application, not understanding why data isn't being fetched. Everything seems correct, the syntax is fine, yet something isn't working. Often, the problem lies in small details that are hard to catch when reviewing the code.

Let’s take a look at an example:

function fetchData() {
    fetch("htts://jsonplaceholder.typicode.com/posts")
      .then((response) => response.json())
      .then((data) => console.log(data))
      .catch((error) => console.error(error));
}

At first glance, the code looks correct. However, upon running it, no data is retrieved. Why? There’s a typo in the URL – "htts" instead of "https." This is a classic example of an error that could cost a developer hours of frustrating debugging.

When we ask AI to refactor this code, not only will we receive a more readable version using newer patterns (async/await), but also – and most importantly – AI will automatically detect and fix the typo in the URL:

async function fetchPosts() {
    try {
      const response = await fetch(
        "https://jsonplaceholder.typicode.com/posts"
      );
      const data = await response.json();
      console.log(data);
    } catch (error) {
      console.error(error);
    }
}

How AI in Frontend Automation Speeds Up UI Creation

One of the most obvious applications of AI in frontend development is generating UI components. Tools like GitHub Copilot, ChatGPT, or Claude can generate component code based on a short description or an image provided to them.

With these tools, we can create complex user interfaces in just a few seconds. Generating a complete, functional UI component often takes less than a minute. Furthermore, the generated code is typically error-free, includes appropriate animations, and is fully responsive, adapting to different screen sizes. It is important to describe exactly what we expect.

Here’s a view generated by Claude after entering the request: “Based on the loaded data, display posts. The page should be responsive. The main colors are: #CCFF89, #151515, and #E4E4E4.”

Generated posts view

AI in Code Analysis and Understanding

AI can analyze existing code and help understand it, which is particularly useful in large, complex projects or code written by someone else.

Example: Generating a summary of a function's behavior

Let’s assume we have a function for processing user data, the workings of which we don’t understand at first glance. AI can analyze the code and generate a readable explanation:

function processUserData(users) {
  return users
    .filter(user => user.isActive) // Checks the `isActive` value for each user and keeps only the objects where `isActive` is true
    .map(user => ({ 
      id: user.id, // Retrieves the `id` value from each user object
      name: `${user.firstName} ${user.lastName}`, // Creates a new string by combining `firstName` and `lastName`
      email: user.email.toLowerCase(), // Converts the email address to lowercase
    }));
}

In this case, AI not only summarizes the code's functionality but also breaks down individual operations into easier-to-understand segments.

AI in Frontend Automation – Translations and Error Detection

Every frontend developer knows that programming isn’t just about creatively building interfaces—it also involves many repetitive, tedious tasks. One of these is implementing translations for multilingual applications (i18n). Adding translations for each key in JSON files and then verifying them can be time-consuming and error-prone.

However, AI can significantly speed up this process. Using ChatGPT, DeepSeek, or Claude allows for automatic generation of translations for the user interface, as well as detecting linguistic and stylistic errors.

Example:

We have a translation file in JSON format:

{
  "welcome_message": "Welcome to our application!",
  "logout_button": "Log out",
  "error_message": "Something went wrong. Please try again later."
}

AI can automatically generate its Polish version:

{
  "welcome_message": "Witaj w naszej aplikacji!",
  "logout_button": "Wyloguj się",
  "error_message": "Coś poszło nie tak. Spróbuj ponownie później."
}

Moreover, AI can detect spelling errors or inconsistencies in translations. For example, if one part of the application uses "Log out" and another says "Exit," AI can suggest unifying the terminology.

This type of automation not only saves time but also minimizes the risk of human errors. And this is just one example – AI also assists in generating documentation, writing tests, and optimizing performance, which we will discuss in upcoming articles.

Summary

Artificial intelligence is transforming the way frontend developers work daily. From generating components and refactoring code to detecting errors, automating testing, and documentation—AI significantly accelerates and streamlines the development process. Without these tools, we would lose a lot of valuable time, which we certainly want to avoid.

In the next parts of this series, we will cover topics such as:

Stay tuned to keep up with the latest insights!