👁️‍🗨️ Due to the simplicity and ease of use of AMMs, they have really carved a niche in the DeFi space. Decentralizing market making in this way is inherent to the cryptocurrency vision!  ​ You can think of an automated market maker as a robot that is always willing to quote you a quote between two assets. Not only can you use AMMs for trustless trading, you can also become a trader by providing liquidity to liquidity pools. This basically allows anyone to become a market maker on an exchange and earn fees by providing liquidity! However, how to increase slippage on uniswap and what is cryptocurrency slippage? Please read on!  🗨️ Introduction! Decentralized finance (DeFi) has seen a surge in interest in Ethereum and other smart contract platforms such as BNB Smart Chain. Yield farming has become a popular method of token distribution, tokenized BTC is growing on Ethereum, and flash loan volume is booming. Meanwhile, automated market maker protocols like Uniswap regularly see competitive trading volumes, high liquidity, and growing user numbers!  🗨️ What is an Automated Market Maker (AMM)? ​ An automated market maker (AMM) is a decentralized exchange (DEX) protocol that relies on mathematical formulas to price assets. Instead of using an order book like a traditional exchange, assets are priced based on a pricing algorithm! This formula may vary for each protocol. Other AMMs will use other formulas for the specific use cases they target. However, they are similar in that they determine prices algorithmically. Traditional market makers typically work with companies with significant resources and complex strategies. Automated market makers decentralize this process and basically anyone can create a market on the blockchain!  🗨️ How does an Automated Market Maker (AMM) work? ​An AMM works similar to an order book exchange in that there are trading pairs - for example ETH/DAI. However, you do not need another counterparty (another trader) to trade. Instead, you interact with a smart contract that "creates" the market for you! In contrast, you can think of AMMs as peer-to-peer contracts (P2C). Since the transaction occurs between the user and the contract, there is no need for a counterparty in the traditional sense. Since there is no order book, there are no order types on the AMM. The price of the asset you want to buy or sell is determined by a formula. Although it's worth noting that some future AMM designs may offset this limitation!  🗨️ What is a liquidity pool? ​ Liquidity Providers (LPs) add pools of funds to liquidity. You can think of a liquidity pool as a large pool of funds that traders can trade. In return for providing liquidity to the protocol, LPs earn fees from transactions that occur within their pool. For Uniswap, LP deposits two tokens of equal value into the ETH/DAI pool, for example 50% ETH and 50% DAI! Why is attracting liquidity important? Because of the way AMMs work, the more liquidity there is in the pool, the less slippage a large order can create. This, in turn, may attract more trading volume to the platform, and more! Slippage issues will vary between different AMM designs, but it's important to keep it in mind. Remember, pricing is determined by an algorithm. Simply put, it depends on how much the ratio between tokens in the liquidity pool changes after a trade. If the ratio changes significantly, there will be a lot of slippage! Taking it a step further, let’s say you want to buy all the ETH in the ETH/DAI pool on Uniswap. Well, you can’t! You have to pay a higher and higher premium for each additional ether, but still never be able to buy all the ether from the mining pool!  🗨️ What is impermanent loss?  ​ Impermanent losses occur when the price ratio of the deposited token changes after you deposit it into the pool. The greater the change, the greater the loss of impermanence. This is why AMMs work best for pairs of tokens with similar values, such as stablecoins or wrapped tokens. If the price ratio between the currency pairs remains within a relatively small range, impermanent losses will be negligible!  On the other hand, if the ratio changes significantly, the liquidity provider may be better off just holding tokens to add funds to the pool. Even so, Uniswap pools like ETH/DAI which are quite vulnerable to impermanent losses are already profitable due to the transaction fees they generate!  🗨️ Finally!  Automated market makers are a staple of the DeFi space. They basically enable anyone to create markets seamlessly and efficiently. While they do have their limitations compared to order book exchanges, the overall innovation they bring to cryptocurrencies is priceless. AMM is still in its infancy. Hopefully this article helped you learn more about how to increase slippage on uniswap and what cryptocurrency slippage is! 🥰