CoinEx | An Introduction to AMM: Profit from Market Making as a Retail User

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Speaking of AMM, we should first introduce the concept of Market Making (MM).
Market making (MM) normally refers to the provision of liquidity and price operations by market makers. These users provide liquidity for a trading platform and other traders through trading activities such as buying or selling assets with their accounts. Through this process, the exchange receives more market liquidity, while market makers earn profits via market making.

However, users often have to record a high monthly trading volume to qualify for market making on a platform. In the meantime, sound market insights and trading strategies are also required. For most exchange users, earning profits as a market maker comes with high thresholds.

That said, how could retail users engage in market making on a trading platform and make a profit while providing liquidity. This is where AMM comes in.



AMM (Automated Market Making) allows retail users to become market makers by injecting funds into the liquidity pool and share the transaction fees charged by the platform. Relying on algorithmic robots, AMM calculates buying and selling prices according to a formula, thereby providing continuous quotes for the market.

AMM is commonly placed into the following categories: Constant Sum Market Makers (CSMM), Constant Mean Market Makers (CMMM), Advanced Mixed Constant Function Market Makers (CFMM), and Constant Product Market Makers (CPMM).
CoinEx launched the AMM function for increased market liquidity back in early 2021. The exchange combines AMM with an order book in terms of the trading mechanism, and the system automatically converts the liquidity pool into an order book. CoinEx uses the CPMM algorithm in AMM, which means that users have to provide two different assets when adding liquidity to the liquidity pool, and the quantity of the two assets will remain a constant product. This approach is characterized in the firm liquidity provision to the market no matter how large the order book is or how small the liquidity pool is.
In CoinEx’s AMM markets, every trading pair is backed by a liquidity pool that contains two assets and executes the deposit, withdrawal, and trade of the assets. This rule is called the Constant Product Equation: when Asset A is added or sold, Asset B must be removed by a certain ratio to ensure the constant product of the two. By the same token, when Asset A is removed or bought, Asset B must be added by a certain ratio.

The liquidity pool contains the assets used for AMM. Any user can inject funds to provide liquidity and receive transaction fee dividends from the platform. Such dividends will be automatically injected into the liquidity pool, and all the cumulative earnings can be obtained at once when removing liquidity. At the moment, the return rate of all CET-related AMM markets stands at 100%, while that of other AMM markets is 50%.

Of course, the transaction rate of AMM markets differs from that of regular markets. Such markets use an independent rate system. The table below shows the difference in rates between retail users and market makers in normal AMM markets and stablecoin AMM markets.



In the next article, we will introduce the specific advantages of CoinEx’s AMM markets compared to AMM on other platforms. Follow CoinEx to explore investment opportunities one step ahead!

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In the last article, we talked about how retail users can also engage in market making via CoinEx’s AMM function and provide liquidity for the platform while earning profits. Unlike CoinEx market makers who are required to record a monthly trading volume of $5 million, retail users only need to hold $200 to earn AMM profits. That said, what makes AMM stand out from the many CoinEx products and gain the recognition of millions of global users?



On CoinEx, AMM markets have the following features:
I. Yield from automated market making
After users provide liquidity in an AMM market, the funds will be deposited into the liquidity pool for automated market making, and 50% of the transaction fees traders paid in this market will be distributed to all liquidity providers according to their liquidity share in the pool. For example, if an AMM market charged $1,000 in transaction fee on a day, CoinEx will distribute $500 to all liquidity providers in the market.
II. Cumulate profits daily and withdraw all at o
nce
The AMM profits are calculated daily and will be automatically allocated to your Market Making Account before 4:00 (UTC) the next day, and you can receive the cumulated AMM profits when removing liquidity from the pool.
III. Free access, free of charge
Assets between Spot Account and Market Making Account can be transferred in real-time by adding and removing liquidity, and no fees will be charged during the operation.

Generally speaking, your AMM revenue mainly comes from the transaction fee dividends allocated by the platform. All users who provided liquidity to the pool will gain 50% of the trading fee generated in the market. Furthermore, the ratio is 100% for all CET trading AMM markets! In other words, if a CET trading AMM market charged $1,000 in transaction fees on a given day, all $1,000 will be allocated to liquidity providers in the market.

How does CoinEx calculate the AMM profit earned by a single user? Let us find out through an example:
Assuming that the transaction fees generated in an LBC/USDT trading market on a certain day are 100 USDT and 400 LBC, if User A holds a 10% liquidity share in the LBC/USDT fund pool, then he/she would receive an AMM profit of 5 USDT and 20 LBC. The equations are as follows:
(1) USDT：100 * 50% * 10% = 5 USDT
(2) LBC：400 * 50% * 10% = 20 LBC

If the market is replaced with a CET trading AMM market, then the ratio would be upgraded from 50% to 100%. Assuming that the user provides liquidity in a CET/USDT market, if the market charged 100 USDT and 400 CET in transaction fee, User A would get 10 USDT and 40 CET if he/she holds a 10% liquidity share in the pool.
(USDT: 100* 100% * 10%=10 USDT, CET: 400 * 100% * 10%=40 CET)
Of course, AMM is also subject to risks. After the assets in your Market Making Account are added to the liquidity pool for automated market making, impermanent losses might occur when the price fluctuates. The term “impermanent loss” refers to the temporary loss caused by market swings when a liquidity provider (LP) adds liquidity to a pool under an AMM environment. According to the pricing mechanism AMM, when an LP removes liquidity, the value of the assets he/she withdrew might be lower than that of the assets he/she provided as liquidity. This change in value is known as the impermanent loss.
It should also be noted, however, impermanent losses are common in the early stage of market making or when AMM is affected by unilateral market conditions. As you earn more profits despite price swings, impermanent losses will gradually be eliminated, which will bring you impressive returns.

That said, how is the APY of AMM markets on CoinEx? In the case of the UMEE/USDT trading AMM market, the 7-day APY reached 1,107.73% as of 3:00 (UTC) on February 17, 2022 (the example should not be relied on as investment advice).
In conclusion, the secret to the continued popularity of CoinEx AMM lies in its low threshold (all users holding $200 in assets can participate in AMM on CoinEx) and high returns.