Before advent of Decentralized Exchanges like Uniswap, cryptocurrencies’ prices were determined by supply and demand in order books. But platforms like Uniswap, due to not using the order lists created the rules called automated market maker or AMM. Here, we are going to discuss about Automated Market Maker Defects. DODO project has offered solutions for it.
Automated Market Maker Defects
This new design is the incentive and creator of many novel ideas and has empowered DeFi industry. However, it has also faced with some problems. The most important ones are slippage in trading and impermanent loss. Slippage is the difference between agreed price to buy an asset and its real price by which users transact. These problems are due to lack of liquidity and market volatility.
The other important and intricate issue which Uniswap and other AMM based platforms may face is impermanent loss. One way to avoid this challenge is to have the price on DEX using a medium oracle like Chainlink (it has its own challenges). It should be mentioned that Uniswap does not use price oracle.
Consequently, DODO exchange has come to solve these problems. DODO is a on-chain liquidity provider project. It utilizes the Proactive Market Maker algorithm (PMM) to provide liquidity. This algorithm has some advantages over automated market maker. We will introduce DODO in tomorrow’s post. It is offering solutions for Automated Market Maker Defects.