The Decentralized Finance market has experienced exponential growth since 2020, but is still a relatively unexplored field of academic research.
This Bachelor thesis aims to contribute to the existing research on the Automated Market Makers and Decentralized Exchanges. It seeks to demonstrate their evolution by comparing the differences between various types of Decentralized Exchanges and evaluating the new feature of Uniswap v3 with the possibility of concentrated liquidity to achieve better liquidity efficiency.
The thesis shows that the Automated Market Maker model is promising on the one hand, as it potentially solves the existing liquidity inefficiencies and improves transparency. However, on the other hand, it is still uncertain from a regulatory and scalability perspective.
Table of Contents
1 Introduction
2 Theory
2.1 Literature Review
2.2 Mechanism of Decentralized Exchanges
2.3 Comparison between Centralized and Decentralized Exchanges
3 Automated Market Makers
3.1 Constant Product Market Maker: Uniswap v2
3.2 Concentrated Liquidity: Uniswap v3
3.3 Challenges and Future Potential of Automated Market Makers
4 Conclusion
Bibliography
Frequently Asked Questions
What are Decentralized Exchanges (DEX)?
DEX are peer-to-peer marketplaces where cryptocurrency traders make transactions directly without a middleman or custodian.
What is an Automated Market Maker (AMM)?
An AMM is a type of decentralized exchange protocol that relies on a mathematical formula to price assets instead of a traditional order book.
What is the difference between Uniswap v2 and v3?
Uniswap v2 uses a constant product formula, while Uniswap v3 introduces "concentrated liquidity," allowing liquidity providers to allocate funds within specific price ranges for better efficiency.
What are the benefits of the AMM model?
It potentially solves liquidity inefficiencies, improves transparency, and allows for 24/7 automated trading without centralized control.
What challenges do DEXs face?
Main challenges include regulatory uncertainty, scalability issues, and technical risks associated with smart contracts.
- Quote paper
- Anonym (Author), 2022, The Evolution of Automated Market Makers and Decentralized Exchanges, Munich, GRIN Verlag, https://www.grin.com/document/1318760
