How Automated Market Makers (AMMs) Work
· One min read
Automated Market Makers (AMMs) are the core innovation behind modern decentralized exchanges like GO Swap.
What is an AMM?
An AMM is a smart contract that allows users to trade tokens directly from liquidity pools instead of matching orders with other traders.
Unlike traditional exchanges:
- No order books
- No intermediaries
- Fully on-chain execution
The Constant Product Formula
Most AMMs, including GO Swap, use the formula:
x * y = k
Where:
x= token A reservey= token B reservek= constant value
This ensures prices adjust automatically based on supply and demand.
Liquidity Pools Explained
Liquidity providers deposit equal values of two tokens into a pool:
- Example: BNB + USDT
- They receive LP tokens representing their share
- They earn fees from every trade executed in the pool
Price Impact & Slippage
Large trades affect pool balances, causing:
- Price impact
- Slippage during execution
GO Swap minimizes slippage through optimized routing and deep liquidity incentives.
Why AMMs Matter
AMMs enable:
- Permissionless trading
- 24/7 liquidity
- Global accessibility
- Fully decentralized price discovery
They are the backbone of modern DeFi infrastructure.