What Is an Automated Market Maker (AMM)?
In crypto, people want greater control over their assets without depending on centralized entities.
On a centralized exchange (CEX) like Coinbase or Binance, you deposit money via bank transfer, card, or crypto. But the moment you deposit, you don’t actually control your assets anymore — the exchange does. Your trades happen off-chain in their system, and you rely on them to approve withdrawals.
On the other hand, a decentralized exchange (DEX) lets you trade directly from your own wallet. You always hold your private keys and never give up control of your funds.
The key difference:
- CEX= the exchange holds your money
- DEX= you hold your money
Enter AMMs
An Automated Market Maker (AMM) is a type of DEX that uses algorithms and liquidity pools to make trading seamless. Instead of creating or matching orders in an order book, you can trade directly against a pool of assets.
With AMMs:
- Prices are set by math, not humans
- You trade against liquidity pools, not individual traders
AMMs vs. Order Book DEXs
| Feature | AMM | DEX (Order Book) |
|---|---|---|
| Trading method | Trade against a liquidity pool | Match buy/sell orders |
| Price execution | Determined by the AMM curve | Best matching orders |
| Limit orders | ❌ Not supported | ✅ Supported |
| Control | You can set slippage tolerance (to avoid bad execution) | You can set exact price and amount |
| Impermanent loss | ✅ Yes | ❌ No |
| Easy to provide liquidity | ✅ Yes | ❌ No |
| Use case | Quick swaps, liquidity provision | Precise trading, market making |
AMMs make it possible to trade even rare tokens that would be too illiquid in an order book.
How Liquidity Pools Work
Think of a self-running stall at a market. The prices adjust automatically depending on supply and demand.
- Users called liquidity providers (LPs) deposit equal values of two tokens into a pool.
- Traders swap tokens in and out of the pool.
- LPs earn a share of trading fees, proportional to their share of the pool.
👉 On Bithomp AMM Deposit, you can easily add liquidity to pools and start earning fees.
LP Tokens
When you add liquidity, you don’t just leave tokens behind — you receive LP tokens. These represent your share of the pool. Later, you can withdraw your liquidity anytime.
👉 Withdraw your liquidity easily on Bithomp AMM Withdraw
Impermanent Loss
Impermanent loss (IL) happens when the value of your deposited tokens changes compared to when you first added them. It’s called “impermanent” because it only becomes permanent when you withdraw.
Key points:
- Small price movements → small IL (usually less then 2%)
- Fees you earn can often cover IL XRPL’s
- Continuous Auction mechanism helps further reduce IL for liquidity providers
XRPL’s AMM (XLS-30)
The XRP Ledger’s AMM (XLS-30) introduces unique features that improve on traditional AMMs:
- Fee Voting – LPs can vote on pool trading fees, making it community-driven. Try it on Bithomp AMM Vote.
- Continuous Auction Mechanism – Rewards liquidity providers while helping offset impermanent loss.
- DEX (Order Book) + AMM Interoperability – You can use both AMM pools and the traditional XRPL order book for the best liquidity.
👉 Want to create your own AMM pool? You can do it directly via Bithomp AMM Create
Auction Rewards
A unique feature of XRPL’s AMM is the continuous auction. Here’s how it works:
- Traders can bid to temporarily “rebalance” a pool by providing one token in exchange for another at slightly better rates.
- The highest bidder wins the auction and gets access to those improved rates.
- The auction proceeds (the difference they pay) are distributed back to liquidity providers.
This system creates extra income for LPs and helps offset impermanent loss. In short, auction rewards = bonus earnings for LPs on top of trading fees.
Benefits of XRPL’s AMM
For Liquidity Providers (LPs):
- Earn fees + auction rewards
- Mitigated impermanent loss
- Community fee voting
For Traders:
- 24/7 liquidity
- Access to a wide range of pairs
- Competitive pricing via AMM + order book integration
Final Thoughts
Automated Market Makers are changing the way people trade crypto by giving users full control over their funds, democratizing liquidity provision, and creating new earning opportunities.
The XRPL’s AMM (XLS-30) adds even more powerful features like fee voting, continuous auctions, and dual interoperability with order books.
Ready to explore XRPL’s AMM yourself?
All available directly on Bithomp.❤️