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How Does the Arbitrage Mechanism Ensure the AMM’s Price Reflects the External Market Price?

Arbitrageurs exploit price differences between the AMM and external markets, rebalancing reserves and aligning the pool's internal price.
Greeks.Live21.11.25

How Does the Arbitrage Mechanism Ensure the AMM’s Price Reflects the External Market Price?

Arbitrageurs monitor the price difference between the AMM pool and external exchanges. If the AMM price is lower than the external price, they buy from the AMM and sell externally for a profit.

If the AMM price is higher, they buy externally and sell to the AMM. This buying/selling activity changes the token reserves in the AMM, automatically adjusting the pool's internal price until the profit opportunity is eliminated.

This continuous action forces the AMM price to track the external market price.

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