Liquidity Pools & AMMs
Discover how automated market makers enable decentralized trading without order books
Your Progress
0 / 5 completed←
Previous Module
Decentralized Exchanges
The AMM Revolution
Traditional exchanges require order books where buyers and sellers post prices. Automated Market Makers (AMMs) eliminate this by using liquidity pools—smart contracts holding token reserves that automatically execute trades using mathematical formulas.
📖
Order Book DEXs
Match buyers with sellers at specific prices. Requires active market makers.
Examples: dYdX, Serum
🤖
AMM DEXs
Use liquidity pools with algorithmic pricing. Anyone can provide liquidity.
Examples: Uniswap, Curve, Balancer
How AMMs Work
1️⃣
Liquidity Provision
Users deposit equal value of two tokens into a pool (e.g., $1,000 ETH + $1,000 USDC)
2️⃣
Receive LP Tokens
Get tokens representing your share of the pool that accrue trading fees
3️⃣
Algorithmic Pricing
Formula maintains constant relationship between reserves, adjusting prices automatically
4️⃣
Trade Execution
Traders swap tokens instantly at algorithmic prices, paying 0.3% fee to LPs
💡
Key Innovation
AMMs democratize market making. Anyone with capital can earn trading fees by providing liquidity—no need for sophisticated bots or market-making expertise. The algorithm does everything automatically.