AMM Liquidity Provision

Automated Market Maker liquidity provision is the process of depositing assets into a smart contract-based pool to facilitate trading on decentralized exchanges. Unlike traditional order books, AMMs use mathematical formulas to determine asset prices based on the ratio of tokens in the pool.

Liquidity providers earn fees from traders in exchange for providing the capital necessary to support these pools. However, they also face the risk of impermanent loss, which occurs when the price of the deposited assets changes relative to when they were deposited.

This model has revolutionized decentralized finance by enabling permissionless trading and liquidity, but it also introduces unique risks related to smart contract security and price divergence.