Blockchain Infrastructures Explained: AMM, Smart Contract and Blockchain Node

Blockchain Infrastructures Explained: AMM, Smart Contract and Blockchain Node


Blockchain is a distributed ledger system that currently powers 500+ cryptocurrency exchanges globally. However, while the increase in the number of available trading platforms gives users expanded access to trading, staking, airdrop farming and yield farming, the truth is many traders overlook the underlying technologies that contribute to trading efficiency.
In this article, we look at three blockchain technologies/infrastructures - AMM, Smart Contracts, and Nodes - and their impacts on trading speed, security, and profitability:

3 Key Blockchain Infrastructures that Affect Everyday Trading

1.        Automatic Market Marker

Automatic Market Marker (AMM) is a decentralized protocol used in DeFi to facilitate automatic and permissionless cryptocurrency trading. AMM replaces the traditional order book that matches seller with buyer with a liquidity pool where assets are constantly swapped for another.

Furthermore, AMM relies on liquidity pools, liquidity providers, and smart contracts; hence, the system is not in the hands of centralized authority. Instead, the market price of an asset is automatically adjusted using a mathematical calculation that is based on the ratio of tokens in a liquidity pool. Examples of Dexes that use AMM are PancakeSwap, Uniswap, and Aave.

Impacts of AMM on Trading Security, Speed, and Profitability

  • Security: While AMM does not impact trading security, it is vital to note that AMM relies on smart contracts to perform automatic trading. Hence, well-audited smart contracts are required to prevent system compromise.
  • Speed: Transacting and price determination is fast with AMM. However, reliance on liquidity pools can sometimes result in failed or slow transactions where demand grows above the tokens available in the liquidity pool.
  • Profitability: AMM cut out intermediaries to ensure that Dexes can facilitate frictionless trading. This impacts token prices and gas fees positively. Also, the presence of a liquidity pool provides another earning mechanism for crypto investors who are willing to supply assets into a liquidity pool to earn part of the gas fees paid on the platform.

2.      Smart Contract

A smart contract is a computer-based program or agreement that automatically executes actions when necessary conditions are met. As a self-executory contract, a smart contract ensures that transactions are automatically completed, trackable, and irreversible. Hence, the system is not prone to manipulation or contractual failure.

For instance, trading ETH/USDT pair requires that you have the right amount of USDT in your wallet. With that, you can initiate a trade without any fear because ETH is automatically transferred to your wallet while USDT is automatically deducted.

Similarly, Decentralized Autonomous Organizations rely on the use of smart contracts to ensure that when the voting is completed in favor of a proposal, the system automatically implements the proposed changes.

Impacts of Smart Contracts on Trading Security, Speed, and Profitability

  • Security: While vulnerabilities in smart contracts can be leveraged to perform unintended transactions, carefully audited and periodically reviewed smart contracts eliminate the need for intermediaries; hence, the system is secured, transparent, and tamper-proof.
  • Speed: Smart contracts enhance trading speed by eliminating manual verification, order reviews, and manual finalization.
  • Profitability: Fast and frictionless trading means lower gas fees and low slippage, which can benefit high-volume trading. Consider it as deducting total expenses from the final profit you make in a trade.

3.      Blockchain Nodes

Blockchain nodes come with different capacities and serve different purposes as well. We have full nodes, light nodes, and validator nodes. Full nodes refer to the type of node used to store full blockchain data while light nodes store specific blockchain data.

Validator nodes, on the other hand, are essential part of the Proof-of-Stake protocols because they are used to maintain blockchain consensus, security, data integrity, and transaction verification. Anyone from anywhere around the world can run a validator node of their preferred blockchain, Ethereum, Solana, Arbitrum, or Optimism.

In regards to capacity, we have public nodes, shared nodes, and dedicated nodes. Each of them determines the speed of validating and finalizing transactions. While public or shared nodes are shared with multiple users and are prone to congestion, slow throughput, and high latency, dedicated nodes grant traders and validators exclusive and private access to interact with a blockchain network.

As a trader, using a dedicated node ensures that you can complete trades without the risk of double-spending, transaction failure, and MEV attacks.

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Impacts of Blockchain Nodes on Trading Security, Speed, and Profitability

  • Security: The security of a trading platform depends on the robustness of its nodes. While public nodes are considered less secure, well-maintained dedicated nodes allow traders to connect to the blockchain securely.
  • Speed: With dedicated nodes, traders can interact with the blockchain swiftly due to the absence of other users on the node. Compared to shared or public nodes, dedicated nodes offer low latency and high throughput, giving traders the chance to perform more transactions and making it an indispensable tool for arbitrage and high-volume traders.
  • Profitability: Traders and liquidity providers can use dedicated nodes to improve their overall trading experience and increase profitability. For instance, low latency can result in faster transactions, lower slippage, and lower gas fees.

Determining the best protocol for trading can be a complex task because you have to consider more than AMM and smart contract audit. Taking a broader approach, such as confirming the blockchain network, cross-chain capacity, and scaling solution, goes a long way to ensure system efficiency. Similarly, successful trading will require investing in reliable dedicated nodes from leading service providers. Leveraging Chainnodes dedicated nodes, you can enhance trading security, optimize performance, and maximize profit.