Stellar Protocol 18 is the technical proposal to make Automated Market Makers on the blockchain.  It was officially deemed ready for implementation. However, still a lot of work to be done and validators will not vote on whether to accept changes by upgrading the network to a new version of the protocol for several months; however, AMM functionality is considered an exciting development.

For clarity on what are AMMs?  What could they do to improve Stellar? Stellar connects the world’s financial infrastructure making it easy to issue assets and to use assets to connect cross-border and cross-currency payments seamlessly.

Market liquidity, which allows the quick and efficient exchange of assets at stable and transparent prices, is fundamental to the network’s success. Liquidity in terms of the numbers of assets available to be bought and sold measured by the spread between buy and sell prices contributing to minimal slippage creates is important to deal with massive handling of international payment flows.  Every asset on Stellar starts with zero liquidity.

To sustain the market, people should be willing to put money in the market. These invested funds are used to facilitate asset conversion. AMMs have the potential to make liquidity provision an accessible, simple, and inclusive process.  They work a bit differently from order books.

“With an AMM, buyers and sellers trade against a liquidity pool rather than trading against existing orders, others have placed on order books. An AMM uses an underlying formula to value two assets relative to one another. As trades execute against the pool and alter the amount of each asset it contains, the relative prices shift based on that formula.

Anyone can provide liquidity by depositing into a liquidity pool — on Stellar, it will just take a single operation — and the pool adjusts prices programmatically. Hence, it removes the need to update orders to manage risk manually.”

Community Response:  This is a great step forward for the network. It was great to watch this progress via the Google mailing list and live protocol discussions.

In layman’s terms, this is the step to make it so you can be paid in any currency on stellar and receive whatever you want?

Yes. This is already theoretically possible with path payments, and it already works well in practice for highly liquid pairs. The new core advancement proposal is meant to attract liquidity by making it much easier to provide.

If AMM is not programmable, how will it survive flash crashes? Does SDF need to drop out of the top 30 to be relevant?