Constant Function Market Maker

A constant function market maker is a specific class of automated market maker that uses a mathematical function to define the relationship between assets in a liquidity pool. The most common example is the constant product formula, but other functions exist to support different types of assets, such as stablecoins.

These models ensure that liquidity is always available and that the price of an asset is a continuous function of the reserves. They allow for predictable trading behavior and enable the creation of decentralized exchanges with unique properties.

The choice of the function determines the efficiency, risk profile, and slippage characteristics of the market. It is a fundamental innovation in the architecture of decentralized trading protocols.