Making Automated Market Makers more efficient — The Role of Covalent
Decentralized finance (DeFi) is a concept that is gaining more and wider acceptance as we seek ways to remove the effect of central authority on financial proceedings. We all know that cryptocurrency and blockchain technology is the norm today, with more and more individuals and institutions taking their place on the broad stage. Decentralized finance is a growing ecosystem that typifies the very concept of blockchain technology — lack of a central authority. Here you have financial applications that are built on blockchain technology and mind you, they have a special attribute. They are built on smart contracts. Smart contracts are unique in that they are automated instructions that are agreed upon with intermediaries and most of all can be reached or accessed by anyone who is on the internet. Here you can borrow, lend or trade without acquiring rights from a central body.
Automated Market Makers (AMM)
Automated Market Makers (AMM) are very important DeFi applications but what exactly are AMMs?? These applications are actually decentralized exchange (DEX) protocols that are based on formulas to price assets. This deviates from the traditional exchange models that use order books instead. To understand it, let’s take this approach. With traditional markets as we all know (say firms), there is a large setup. Many resources come into play and they use complex strategies to carry out transactions. In short, you need another trader on the other side to make a trade. You sell a coin or fiat currency for another and you have somebody on the other side making the exact opposite trade. With the automated market maker there are no counter parties. All you have to do is interact with the smart contract that helps you to settle the market or trade. So it’s just you and the platform. In the platform, there is a concept called liquidity. Here a pool is created by a group of anonymous individuals called liquidity providers. These liquidity providers supply tokens to liquidity pools from which the smart contract can take and add tokens from a trader easily. This concept is beautiful. Who wouldn’t want to enjoy a decentralized financial option like this? So how does Covalent play a role in ensuring that automated market makers work well? First of all, what is Covalent?
Covalent is a protocol that provides a unified API that would help provide a wide range of opportunities by bringing visibility and transparency through a series of assets across a variety of blockchain assets. Imagine that feeling. One single API with which you can pull lots of transaction data from various blockchains without implementing any code. Before we continue and see why Covalent is unique and how it will help improve AMMs, let’s look at what APIs are. An API is short for Application Programming Interface. A term that is common to programmers and developers and API helps you to interact with separate software components or resources programmatically. So API helps you interact with an application that has it. Here you’re trying to organize the complex nature of applications in a simple way. This brings us back to Covalent. All blockchains have their API and so have a set of programmed rules for interacting with them. With covalent you don’t have to be bothered with how you’re going to interact with one blockchain (say Ethereum) or another (say Binance Smart Chain). You have one API that works for all. Not all blockchains have been included but work is done to make more and more blockchains come under this unified API. This makes Covalent your one-API-fits-all platform but let’s look at how Covalent would help make AMMs even better.
- Availability of data: With Covalent API, you have a complete index of entire blockchains. What does this mean? You are looking at having the data of every transaction, wallet or contract within an entire blockchain. Now with its unified API, you’re not looking at just one blockchain; you’re looking at many blockchains and many tokens within those blockchains. What more does an AMM need than this interoperability??
- Multichain support: This availability of data on various blockchains make the Covalent API interoperable meaning that an AMM with covalent API would have indices and users on seven (7) different blockchain networks. Bear in mind that more will be added
- Composability. This is very important. AMM tech developers can build AMM applications and many others very easily from scratch without a query code. This is massive.
The AMM DEXes would massively benefit from Covalent solutions and help push the DeFi narrative to all borders.