AMM

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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 simple x * 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.

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Why launch an AMM and an order book?

Spot trading is not a one-size-fits-all environment, and we can observe how different liquidity gravitates to different DEXs. Because of the passive liquidity nature of AMMs, they are better suited for long-tail assets (such as memecoins), which are markets with shallow liquidity, lower trading volume, and unsophisticated market makers. Order books are better suited for bluchip assets, but the pricing mechanism of a limit order book for the long-tail assets is far too precise, and orders would be sparse.

In order to support all sorts of assets on GTE, we allow liquidity providers to choose between the AMM and the order book for any given token pair — and traders as well.