Overview
AMMs are the underlying technology for most decentralized exchanges. Instead of matching buyers and sellers, an AMM uses a mathematical formula (like x * y = k) to determine the price of assets in a liquidity pool.
Key Concepts
- Constant Product Formula: Ensures that the total value of the assets in the pool remains balanced.
- Price Impact: Large trades can move the price of the asset significantly within the pool.
- Arbitrage: Traders use price differences between the AMM and other exchanges to keep the AMM's prices accurate.
Examples
Uniswap, SushiSwap, and PancakeSwap are all based on AMM models.