AMM

An Automated Market Maker (AMM) is a type of decentralized exchange (DEX) protocol that uses mathematical formulas to set asset prices rather than relying on traditional order books. AMMs enable permissionless, 24/7 trading without requiring buyers and sellers to be matched directly.

How AMMs Work:

1. Liquidity providers deposit asset pairs into pools (e.g., ETH/USDC)
2. The AMM uses a formula to determine prices based on pool ratios
3. Traders swap against the pool, changing the ratio
4. Price automatically adjusts as ratios change

Common AMM Formulas:

Constant Product (x * y = k): - Used by Uniswap, SushiSwap - Price impact increases with trade size - Works well for general-purpose trading

Constant Sum (x + y = k): - Maintains fixed price regardless of ratios - Used in some stablecoin pools - Vulnerable to arbitrage

StableSwap Curve: - Used by Curve Finance - Optimized for similar-value assets (stablecoins) - Lower slippage for correlated pairs

Concentrated Liquidity (Uniswap v3): - LPs choose specific price ranges - Higher capital efficiency - More complex management

AMM Benefits: - No order book needed - Permissionless listing - Always-available liquidity - Simple user experience

AMM Drawbacks: - Impermanent loss for LPs - Slippage on large trades - Susceptible to MEV attacks - Capital inefficiency (traditional models)