Automated Market Maker Execution

Automated market maker execution refers to the process by which trades are settled in a decentralized exchange using a mathematical formula rather than a traditional order book. The formula, often based on the constant product model, determines the price of the assets in the pool based on the ratio of the tokens available.

This ensures that there is always liquidity available for trades, regardless of the size. However, it also means that the price can change during the execution of a trade, leading to slippage.

Understanding how AMMs execute trades is fundamental for users to manage their expectations and risks. It is a core concept in DeFi, enabling the permissionless exchange of digital assets.

The design of the AMM formula has a direct impact on capital efficiency and price discovery. It is a key area of innovation in financial engineering.