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How Does an Automated Market Maker (AMM) Manage Liquidity in a Decentralized Exchange (DEX)?

Uses a constant product formula (x y=k) to automatically price assets in a pool, ensuring continuous, decentralized liquidity provision.
Greeks.Live07.11.25

How Does an Automated Market Maker (AMM) Manage Liquidity in a Decentralized Exchange (DEX)?

An Automated Market Maker (AMM) manages liquidity using a constant product formula (e.g. x y = k) to determine the price of assets in a liquidity pool. Liquidity providers (LPs) deposit a pair of assets into the pool, and the AMM's algorithm adjusts the price based on the ratio of the assets remaining after each trade.

This structure ensures that a market is always available, even if there are no traditional buyers or sellers. The AMM continuously rebalances the pool to maintain the constant product, providing automated, decentralized liquidity.

How Does the Concept of Slippage Relate to the Size of the Constant Product (K) in an AMM Pool?
What Is the Significance of the Constant Product Formula ($x Y=k$)?
What Is an Automated Market Maker (AMM) and How Does It Function in DeFi?
What Is an Automated Market Maker (AMM) in the Context of a DEX?

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