In traditional finance, trading activities often take place on centralized exchanges (CEX) like Binance or Coinbase. These platforms use an order book system where buyers and sellers place orders at specific prices, and the exchange acts as a central intermediary to match them. Decentralized exchanges (DEXs) offer a different approach. Built on blockchain technology, they are accessible 24/7 to anyone with a compatible crypto wallet and tokens. A core technology for many DEXs is the Automated Market Maker (AMM).

Instead of relying on order books, AMMs utilize liquidity pools. These are smart contracts that hold reserves of two or more tokens, for example, a pair like ETH/USDC. The price of the assets in the pool is determined by a mathematical formula, commonly expressed as x⋅y=k. In this formula, x and y represent the quantities of the two tokens in the pool, and k is a constant product. When a trader swaps one token for another, the quantities of x and y change, which in turn adjusts the price for the next trade. This design ensures that liquidity is always available. However, it can also lead to slippage, especially for large trades. A significant trade can alter the token ratio in the pool to an extent that the average price paid by the trader is different from the initial price quoted.

When placed in AMM liquidity pools with stablecoins or other cryptocurrencies (e.g., XAUm/USDC or XAUm/ETH), XAUm can be used to participate in yield-generating opportunities offered by the liquidity pools. Because its value is tied to the market price of gold where each token is backed 1:1 by physical gold certified by the London Bullion Market Association (LBMA), which has historically exhibited lower volatility than many crypto assets, it may appeal to investors looking to balance their portfolios. As a globally recognized asset, gold has historically attracted broad trading interest. 

By tokenizing gold, assets traditionally held as a store of value can also be utilized within the DeFi ecosystem. XAUm holders may choose to allocate their gold-backed assets to liquidity pools, thereby accessing opportunities offered by decentralized protocols while maintaining exposure to gold’s benefits. 

Disclaimer: This content is for informational purposes only and should not be construed as financial or investment advice. Investing in cryptocurrencies and participating in DeFi protocols involves significant risk, including but not limited to market volatility, smart contract vulnerabilities, and potential impermanent loss. You should conduct your own research and consult with a qualified professional before making any financial decisions. Past performance is not indicative of future results.