Asset Pricing Formula

An asset pricing formula is the mathematical model used by decentralized exchanges to determine the price of an asset based on the available supply in a liquidity pool. The most common is the constant product formula, which ensures that the product of the reserves of two tokens remains constant during a trade.

This creates a predictable pricing curve that allows for constant liquidity. Different protocols may use variations of this formula to optimize for specific assets like stablecoins or volatile pairs.

These formulas are the algorithmic heart of automated market making.