Automated Market Maker AMM Mechanics

Automated Market Maker AMM Mechanics refers to the algorithmic logic used by decentralized exchanges to facilitate trading without a traditional order book. Instead, these protocols use liquidity pools and mathematical formulas to determine asset prices based on the ratio of tokens in the pool.

When a user trades against the pool, the price shifts according to the constant product or other defined curve. This approach ensures constant liquidity availability but introduces risks like impermanent loss for liquidity providers.

AMMs are a defining feature of decentralized finance and have fundamentally changed how derivatives and spot assets are traded on-chain. Understanding these mechanics is crucial for analyzing liquidity and price discovery in decentralized markets.