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Author: Admin | 2025-04-27
It involves depositing funds into a liquidity pool—smart contracts that hold specific pairs of assets. This process creates liquidity for trades and contributes to price stability.Liquidity providers in AMM DEXes ensure transaction flow and are incentivised with a share of the trading fees, LP tokens, and participation in protocol governance. The smart contracts use algorithms to automate price quoting for these assets, employing formulas such as constant product and constant mean. Some of the most popular AMMs using these methods include:Constant product AMM This is one of the most common types of AMMs, and it is used by exchanges such as Uniswap. Under this model, the funds in the liquidity pool are priced according to a formula that keeps the product of the quantities of the two assets constant. This causes the impact that trades have on price movements to be non-linear.x × y = kWhere:x and y represent the quantities of the two different tokens in the liquidity pool.k is a constant value, meaning the product of x and y must always be the same.Constant sum AMM Similar to constant product, constant sum AMMs such as Balancer also maintain the price constant by applying a simple arithmetic formula. The only difference is that it relies on the sum of the quantities to stay constant instead of the product. These are commonly used for liquidity pools that contain more than one asset.x+y=kWhere:x and y are the quantities of the two tokens.k is a constant sum.Constant mean AMMThere are also AMMs
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