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Let’s Learn More About Liquidity Mining(Begin with Order Book and AMM)

2021-09-22 08:18:43 UTCRead:76687

The “Coincidence Of Wants” (also known as double coincidence of wants) is an economic phenomenon where the seller must hold exactly the items that the buyer wants in order to complete a transaction. It’s this explicit condition that makes direct barter difficult to ute. Specifically, in the field of finance, the challenge is how to match as many transaction parties as possible for various assets with improving transaction efficiency and abating transaction costs. Several solutions have been offered to overcome this challenge and liquidity mining (AMM, or Automated Market Makers) is one of them.

Maker: Maker is a trader who submits the name, quantity and price of their underlying assets for potential trading. If there is no trader in the market at that time, then the order will remain on the exchange’s marketplace, providing quotes for the entire market.

Taker: Taker refers to a trader who completes an order with the maker. That is, according to the price of the current order on the exchange’s marketplace, a number of orders will be issued by the makers that will be completed by the takers.

It should be noted that the “maker” and “taker” should not be confused with “buyers” and “sellers”. A maker is a user who increases liquidity by adding orders to the order book while a taker is a user who reduces liquidity by taking orders off the order book. Usually, takers and makers pay a certain amount of trading fees. However, since makers are able to provide liquidity for the market, many exchanges charge them a lower fee than takers. In this way, more investors will be encouraged to add orders to the order book.

AMM: The use of algorithmic robots to simulate trading actions and provide liquidity to the market is known as AMM(Automated Market Maker). Gate.io's AMM calculates transaction prices based on the Constant Product Market Maker Model (x*y=k) and thus provides continuous quotes for the market.

Liquidity Mining: Liquidity mining is a way to earn a passive income with crypto by pledging or staking cryptocurrencies into a liquidity pool. This is a new trend in decentralized finance (DeFi), that enables investors to earn maximum returns on their digital assets.

Impermanent loss: Impermanent loss is the loss of capital due to the spread caused by the price change of a digital asset after an investor has deposited his cryptocurrencies into an AMM liquidity pool. No matter in what direction the price of a digital asset moves, it will generate a loss, and the greater is the deviation, the greater is the loss.

II. Order Book and AMM

Currently, most exchanges arrange the transaction matching through an Order Book. In this mechanism, traders are divided into makers and takers. The maker will add an order containing the name, quantity and target price of their underlying assets for potential trading. The taker refers to a trader who completes an order with the maker. Orders issued by the makers will be traded with those issued by the takers when the transaction price reaches the target one of the takers.

Liquidity refers to the speed at which a transaction can be conducted without producing significant price fluctuations in the market, or the ability of market participants to transact at market prices (good liquidity for low slippage). Liquidity is fundamental to the exchange, and it’s necessary for an active market to embrace good liquidity for quickly matching transactions in different trading volumes and prices.

From the perspective of liquidity, the maker is obviously the provider of liquidity. All orders submitted by makers contribute to the “thickness” of the order book. More is the order, the greater is the thickness, and hence, the more the order book can absorb large amounts of takers’ needs. In contrast, the taker is the liquidity consumer. The order book aggregates the trading demand in the market, and the maker only needs to trade with the ready-made need.

For coins with huge trading volumes like Bitcoin and Ether, the order book model is very efficient and allows for quick price discovery. However, for those coins that have not yet gained much attention, and only have small trading volumes, or are not actively traded, it is difficult to ensure that trades are made quickly using this model alone. To compensate for the lack of liquidity in some coins and to make it easier for users to trade while earning gains from idle assets, Gate.io has upgraded its certain markets to the automated market maker (AMM) mode.

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