Aave announced that it has released an AMM Market. This will enable Uniswap and Balancer users to deposit their LP tokens as collateral in the Aave protocol.
Aave is a decentralized liquidity protocol. This means it allows users to access liquidity across various assets among multiple pools. One new liquidity pool will be an Automated Market Maker (AMM).
What is an AMM?
In 2018, Uniswap became the first protocol to utilize an automated market maker. Traditionally, a market maker is a third-party that finds the price point at which two trading parties are willing to make the transaction. Uniswap pioneered the concept of removing that middleman, pooling all available liquidity together, and setting price points according to an algorithm.
In practice, this allows users of the same blockchain, in this case, Ethereum, to swap assets without the need for a centralized intermediary. By providing liquidity for the pool, users can earn fees for doing so. In fact, AMM was one of the first ways to earn a passive income in the DeFi ecosystem.
How about LP tokens?
When users provide liquidity to the pool, they automatically get Liquidity Provider (LP) tokens. Usually, an LP token is proportionally half the crypto asset deposited and half ETH. This makes them potentially less volatile. These LP tokens also accrue a proportion of the trading fees that occurred while still in the liquidity pool.
Last year, Aave first introduced an AMM idea with an “Aave Uniswap V1 Market” proof-of-concept. This enabled users of Uniswap V1 to deposit their LP tokens as collateral in the protocol. This proved to be popular enough to enable LP tokens from Balancer then as well.
The AMM Market is the first of many planned markets for Aave. Aave Governance will determine proposals and decisions about which AMM protocols and collateral to add. Since Aave is decentralized, Aave Governance is made up of the community of Aave token holders.
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