Automated Market Maker Model

The automated market maker model is a decentralized exchange architecture that replaces traditional order books with mathematical formulas to price assets. Instead of matching buyers and sellers directly, users trade against a pool of liquidity provided by other participants.

The most common formula, constant product, ensures that the product of the reserves of two assets remains constant, effectively creating a curve that provides liquidity at all price levels. This model allows for continuous trading without the need for an active market maker, making it highly efficient for long-tail assets.

However, it introduces risks like impermanent loss for liquidity providers and requires reliable price feeds to prevent divergence from global market prices.