What is a Constant-Product AMM?
Underpinning automated market makers (AMMs) are liquidity pools, which are crowdsourced pools of assets for any given token pair. Depositors into these pools are called liquidity providers (LPs), and they profit from fees generated by trades using the pool liquidity. AMMs are “automated” in the sense that they operate with an established pricing function that allocates liquidity in the pool to different price levels for trading. In a constant-product AMM, LPs deposit an equal value amount of each token into the pool (50/50 distribution), and the simplex * y = k
curve determines pricing. This function establishes a range of prices for the two tokens, given all the liquidity in the pool. The supplies of token x
and y
fluctuating must maintain a constant product k
.
The most well known constant-product AMM is Uniswap V2, which GTE has modeled the AMM after.