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Clarify AMM blog details

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mDuo13
2024-03-21 14:15:09 -07:00
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@@ -8,9 +8,9 @@ Any server that is currently working on Mainnet should continue to work after AM
## Background
The XRP Ledger has included a central limit orderbook decentralized exchange (CLOB DEX) since its inception, but other blockchains largely moved in the direction of facilitating currency exchanges through Automated Market Makers (AMMs), often using a "constant product" algorithm. In both systems, users offer some of their assets for exchange on-ledger, and the blockchain matches those with users trying to acquire specific assets; the users providing the assets take on _currency risk_, the possibility that exchange rates will move not in their favor. In the CLOB DEX, users explicitly set the price they're willing to exchange, whereas in an AMM a mathematical formula sets the price based on the supply and demand of currencies involved. In both cases, the market works most efficiently when there is a high volume being supplied and exchanged.
The XRP Ledger has included a central limit order book decentralized exchange (CLOB DEX) since its inception, but other blockchains largely moved in the direction of facilitating currency exchanges through Automated Market Makers (AMMs), often using a "constant product" algorithm. In both systems, users offer some of their assets for exchange on-ledger, and the blockchain matches those with users trying to acquire specific assets; the users providing the assets take on _currency risk_, the possibility that exchange rates will move not in their favor. In the CLOB DEX, users explicitly set the price they're willing to exchange, whereas in an AMM a mathematical formula sets the price based on the supply and demand of currencies involved. In both cases, the market works most efficiently when there is a high volume being supplied and exchanged.
Advantages of a CLOB DEX include fine-grained control over amounts and prices, and the fact that offered funds aren't locked up so they can also be used for other purposes while waiting for a match. (For example, one trader can offer up the same $100 for EUR, CAD, JPY, and so on, giving some or all of it to whoever comes first.) Advantages of an AMM include the simplicity of not needing to manually update exchange rates or add new offers as volume flows back and forth.
Advantages of a CLOB DEX include fine-grained control over amounts and prices, and unlike with an AMM, the offered funds aren't locked up while waiting for a match. (For example, using the CLOB DEX, one trader can offer up the same $100 for EUR, CAD, JPY, and so on, giving some or all of it to whoever comes first.) Advantages of an AMM include the simplicity of not needing to manually update exchange rates or add new offers as volume flows back and forth. (For example, if the flows between two assets are mostly one-sided, the price to exchange via the AMM will get steadily more expensive to reflect the imbalance of supply and demand, whereas in the CLOB DEX the traders would have to explicitly cancel their old offers and place new ones at higher prices.)
The AMM amendment adds Automated Market Makers that are designed to synergize with the CLOB DEX to bring traders the flexibility to provide liquidity in whatever method suits them best. Currency trades can automatically use a combination of the AMM and CLOB DEX to achieve the best rate. Also, unlike the AMMs on other blockchains, the XRP Ledger's AMM comes with a fee auction mechanism where liquidity providers can bid on the opportunity to trade against the AMM with reduced fees.