What Is the Significance of the Constant Product Formula (X Y=k)?
The constant product formula, x y=k, is the core algorithm used by many AMMs like Uniswap. It dictates that the product of the quantities of the two assets in the pool (x and y) must remain constant (k).
This formula ensures that there is always liquidity available for a trade, no matter how large. It automatically determines the new price ratio after a swap, creating a smooth, continuous price curve.
Glossar
AMM
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) like Uniswap, dictates the relationship between the reserves of two tokens within a liquidity pool.