Course Content
What Is an Automated Market Maker (AMM)?
You could think of an automated market maker as a robot that’s always willing to quote you a price between two assets. Some use a simple formula like Uniswap, while Curve, Balancer and others use more complicated ones. Not only can you trade trustlessly using an AMM, but you can also become the house by providing liquidity to a liquidity pool. This allows essentially anyone to become a market maker on an exchange and earn fees for providing liquidity. AMMs have really carved out their niche in the DeFi space due to how simple and easy they are to use. Decentralizing market making this way is intrinsic to the vision of crypto.
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What Is an Automated Market Maker (AMM)?
About Lesson

Impermanent loss happens when the price ratio of deposited tokens changes after you deposited them in the pool. The larger the change is, the bigger the impermanent loss. This is why AMMs work best with token pairs that have a similar value, such as stablecoins or wrapped tokens. If the price ratio between the pair remains in a relatively small range, impermanent loss is also negligible.

On the other hand, if the ratio changes a lot, liquidity providers may be better off simply holding the tokens instead of adding funds to a pool. Even so, Uniswap pools like ETH/DAI that are quite exposed to impermanent loss have been profitable thanks to the trading fees they accrue.

With that said, impermanent loss isn’t a great way to name this phenomenon. “Impermanence” assumes that if the assets revert to the prices where they were originally deposited, the losses are mitigated. However, if you withdraw your funds at a different price ratio than when you deposited them, the losses are very much permanent. In some cases, the trading fees might mitigate the losses, but it’s still important to consider the risks.

Be careful when depositing funds into an AMM, and make sure you understand the implications of impermanent loss. If you’d like to get an advanced overview of impermanent loss, read Pintail’s article about it.
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