InfinitySwap is a decentralized finance (DeFi) platform that enables users to trade cryptocurrencies without the need for intermediaries like banks or exchanges. One of the key features of InfinitySwap is its use of an Automated Market Maker (AMM) system to facilitate trades.
Here’s how AMMs work and how they are used in InfinitySwap.
What is an AMM?
An Automated Market Maker (AMM) is a type of algorithmic trading system that allows users to trade cryptocurrencies without relying on an order book. Instead, AMMs use a pool of liquidity to automatically set the price of assets based on supply and demand. The basic idea is that buyers and sellers can swap tokens with the AMM, which adjusts the price of each token based on the ratio of tokens in the pool.
In an AMM, users provide liquidity by depositing two types of tokens into a pool. These tokens are then used to execute trades automatically based on a predetermined algorithm. Every trade made on an AMM incurs a transaction fee, which is collected by the platform and distributed to liquidity providers as a reward for their contribution.
All About InfinitySwap's AMM
Pairwise Token Pricing
InfinitySwap's AMM is a two-token system that uses a pair of tokens to determine the price of each asset. This pair of tokens is also known as a pool or pair, and they are used interchangeably in InfinitySwap. Each pool has a fixed transaction fee of 0.3%, which is distributed among the liquidity providers. InfinitySwap also allows for a protocol fee, which is a portion of the transaction fee that is sent to a specified principal.
To use InfinitySwap's AMM, users first need to transfer their tokens to the platform. These tokens are held as transit tokens until they are used in a trade. Until then, they do not contribute to the internal supply and can be redeemed by the refund transfer method. Once tokens are transferred, users can trade them on InfinitySwap by swapping one token for another.
In order to provide liquidity to the platform, users can use the mint method. This method is used to add tokens to the AMM pool, which allows for trading to occur. When a user mints a token, they are essentially adding it to the pool and creating new tokens called supply tokens. These supply tokens represent the user's contribution to the pool, and they receive a share of the transaction fee for providing liquidity.
When a liquidity provider wants to retrieve their tokens from the pool, they can use the burn method. This method allows the user to withdraw their liquidity from the pool, and it also incurs a transaction fee.
Configurable Token Weight
InfinitySwap's AMM also allows for configurable token weights. Token weights are used in relative price calculations, and the higher weight of a token means that larger reserves of that token are needed to maintain the same relative price. For example, if we have a pool with tokens TKN1 and TKN2 that are traded at equal price, a 50/50 pool would require equal reserves of both tokens. If the pool weights are 20/80, then the reserves of TKN2 would have to be four times higher than the reserves of TKN1 to maintain the same price.
Liquidity Bootstrapping Pools
InfinitySwap also has a Liquidity Bootstrapping Pools (LBP) feature, which is useful for new tokens that have limited liquidity. LBP uses weighted pools with a higher weight of a new token, which allows teams to distribute larger amounts of the new token and reduce trade slippage. Additionally, LBP allows for gradual weight changes to help with distributing tokens at a fair market value.
Word of Caution: Trade Slippage in DeFi
Trade slippage refers to the difference between the expected price of a trade and the actual price at which it is executed. In other words, it's the difference between the price a trader wants to buy or sell an asset at, and the price at which the trade is actually executed.
Trade slippage can occur in any market, but it is particularly relevant in decentralized markets like cryptocurrency exchanges, where liquidity can be limited and price volatility is common. In these markets, slippage can occur when a large trade is made that exceeds the available liquidity in the market, causing the price to move against the trader.
For example, if a trader wants to buy 100 units of a cryptocurrency at a price of $10 per unit, but there are only 50 units available at that price, the trader may end up paying a higher price for the remaining 50 units. This means that the trader's average cost per unit will be higher than $10, resulting in slippage.
Slippage can have a significant impact on the profitability of trades, especially in markets with high volatility and low liquidity. For this reason, it is important for traders to carefully consider the potential for slippage when making trades and to use strategies that can minimize its impact. In decentralized markets like those supported by InfinitySwap, the use of Liquidity Bootstrapping Pools with weighted pools can help reduce slippage and provide a more fair and efficient trading experience — but trade slippage can never be eliminated entirely.
Conclusion: InfinitySwap's AMM and the Future of DeFi
In summary, InfinitySwap's AMM is a powerful tool that enables users to trade cryptocurrencies without the need for intermediaries like banks or exchanges. With its innovative AMM, InfinitySwap is able to provide a decentralized trading platform that is accessible to anyone with an internet connection. While AMMs can be complex, InfinitySwap has made it easy for users to provide liquidity and participate in trading. By allowing for configurable token weights and the use of Liquidity Bootstrapping Pools, InfinitySwap has also provided a way for new tokens to gain liquidity and be traded fairly. This is an important feature for the growth and development of the cryptocurrency industry as a whole.