# Automated Market Maker Protocols ⎊ Area ⎊ Resource 2

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## What is the Protocol of Automated Market Maker Protocols?

These decentralized frameworks establish the mathematical functions that determine asset pricing and trade execution within non-custodial environments. They replace traditional order books with constant product or constant sum formulas to facilitate permissionless trading of crypto assets and related derivatives. Adherence to the defined invariant is fundamental to the system's operational integrity and capital provisioning.

## What is the Liquidity of Automated Market Maker Protocols?

Providing continuous two-sided quotes is the primary function, achieved by incentivizing participants to deposit assets into pooled reserves. This mechanism ensures immediate execution for traders, albeit at a price determined by the pool's current composition and the trade size relative to total liquidity. Managing impermanent loss remains a key consideration for liquidity providers interacting with these dynamic pricing structures.

## What is the Model of Automated Market Maker Protocols?

The underlying pricing model dictates the relationship between the assets in the pool, often utilizing a power function or a variation thereof for stablecoin pairs. Sophisticated iterations incorporate external market data or oracle inputs to better align the on-chain price with off-chain reference rates for derivatives settlement. Adjusting the parameters of this function is crucial for optimizing capital utilization and minimizing arbitrage opportunities.


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## [Automated Market Operations](https://term.greeks.live/term/automated-market-operations/)

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**Original URL:** https://term.greeks.live/area/automated-market-maker-protocols/resource/2/