Initially proposed by Vitalik Buterin in a Reddit post, market making is simply the process of creating volume on an exchange by placing both buy and sell orders at a given price and profiting from the spread. AMMs, short for automated market makers, simply automate this process. This refers to any type of market maker feature that is automated.
The term became especially known with Uniswap’s success — Uniswap & other similar Liquidity Providers (LPs) DEXs require AMMs because they algorithmically determine the price based on the balance of pooled liquidity.
Why do AMMs exist?
Bot trading/market making is a feature of many CEXs and DEXs because all exchanges require liquidity as a key feature to ensure they can serve their customers effectively. As a result, many exchanges incentivize this liquidity provision by providing users/market makers with the opportunity to profit from market-making.
For example, the centralized exchange Kucoin uses a very similar grid trading bot that you can fund as a holder — they simply call it a “bot”, but it’s effectively the same principle as the grid trading strategy employed by the AMM bot of the dex.
What are the differences between different AMMs?
The main difference between Uniswap’s AMM and an orderbook AMM (like Stakenet’s AMM UI) is that an orderbook AMM responds more effectively to slippage because you aren’t required to supply both sides of the exchange to earn money.
This allows for better management of slippage and better profit potential through estimation of market depth — because it’s actual orders being filled peer-to-peer, not an algorithmic estimate of price/volatility based on the liquidity balance of the pooled tokens. You can interpret that market depth and algorithmically place orders at key points in that market depth to maximize profit potential.
Both approaches have the same objective — ensuring liquidity is provided to support the market for the coin pair in question. The difference is that AMM bots for traditional orderbook exchanges allow you to have more insight into the market you’re providing liquidity to, which allows for better development of algorithmic market-making — and this diversity of market-making strategies allows for more resilience and higher profit potential.