How Do Automated Market Makers (AMMs) Create Arbitrage Opportunities in DeFi? ▴ Learn

How Do Automated Market Makers (AMMs) Create Arbitrage Opportunities in DeFi?

AMMs use mathematical formulas, such as x y = k, to determine asset prices based on the ratio of tokens in their liquidity pools. When the price of an asset on an external exchange changes, the AMM's price becomes temporarily misaligned.

Arbitrageurs step in to buy the cheaper asset from the AMM and sell it elsewhere (or vice-versa), pushing the AMM's pool ratio back toward the external market price.

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