Constant Product Market Maker Mechanics

Constant product market maker mechanics are the mathematical rules governing how assets are priced and traded in a liquidity pool, defined by the formula x times y equals k. This model ensures that there is always liquidity available for a trade, as the price moves along a curve as the pool's ratio of assets changes.

In the context of liquidation, this mechanic allows the protocol to automatically sell collateral even when no human buyers are present. The efficiency of this process depends on the initial pool balance and the trade size.

While it provides continuous liquidity, it also results in higher slippage for large trades, which can be a concern during major liquidation events. Understanding this math is critical for predicting how a protocol will behave under stress.