Automated Market Makers and Stablecoins in DeFi
Automated Market Makers (AMMs) are decentralized finance (DeFi) tools enabling peer-to-peer cryptocurrency trading without centralized exchanges. AMMs use algorithms and liquidity pools, where users deposit assets, to automatically determine prices based on supply and demand. A mathematical formula maintains balance within the pool as trades occur. Stablecoins are frequently used in AMMs to reduce volatility for traders and liquidity providers. The system incentivizes liquidity provision through transaction fees.