What Is an AMM?
An AMM (automated market maker) is a DEX protocol that prices tokens using a mathematical formula instead of an order book. Trades execute against a liquidity pool rather than a specific counterparty.
How AMMs Price Tokens
The most common model uses the constant product formula: x x y = k, where x and y are the token reserves in a pool and k stays constant. When a user buys one token, the ratio between the two reserves shifts, which changes the price. The larger the trade relative to the pool’s total depth, the more the price moves (this is called price impact).
Liquidity Providers
Anyone can deposit tokens into an AMM pool and earn a share of trading fees. In return, they receive LP tokens representing their share of the pool. The main trade-off is impermanent loss: if the price of one token moves significantly against the other, an LP ends up with less total value than they would have had by simply holding both tokens outright.
Where AMMs Are Used
Most DEXes on Solana use AMM models, including Raydium and Orca. AMMs are also the pricing engine behind new token launches on platforms like pump.fun, where liquidity pools are created at the moment a token graduates from the bonding curve.
FAQ
An AMM (automated market maker) is a DEX protocol that prices tokens using a math formula instead of order books. Trades go against a liquidity pool, not a specific buyer or seller.
The most common model is the constant product formula (x x y = k). When you buy a token, the pool’s reserve ratio changes, which moves the price. Larger trades have more price impact on smaller pools.
Impermanent loss happens when the price of a token in a pool changes significantly after deposit. The LP ends up with a different token ratio than they put in, which can be worth less than holding the tokens separately.
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