AMM liquidity refers to the total capital deposited into an Automated Market Maker protocol for trading digital assets. These capital pools enable automated exchanges without traditional order books. Liquidity providers contribute funds to these pools, earning fees from trades executed against their supplied assets. This mechanism facilitates continuous trading and price discovery on decentralized exchanges.
Context
The state of AMM liquidity is a critical indicator for decentralized exchange activity and market depth. Concerns often revolve around impermanent loss for liquidity providers and the concentration of capital in certain pools. Regulatory bodies are observing AMM liquidity structures to understand potential systemic risks and market manipulation vectors.
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