SuperEx Educational Series: AMM — The Magical Engine That Makes Trading No Longer Require a “Counterparty”

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If you stay in the crypto trading market long enough, you’ll eventually notice a very magical phenomenon: in a decentralized exchange (DEX), you can always buy the token you want, and you can always sell the token you want. Even stranger — you’re not actually trading with “a specific person.”

Although you never wait for a counterparty, and no one is placing limit orders for you, something magical happens: once you click “trade,” a price appears instantly, and settlement happens on-chain immediately.

So here come the questions:

• Who is matching these trades?
• Who provides the quotes?
• Why can a completely unattended DEX operate 24/7?
• How does it determine the price?
• Why does the price rise the more you buy during a bull market for tokens like X2Y2, UNI, PEPE?
• Why can someone earn fees just by depositing liquidity?
• Why do others say “LPs lose money” because of something called “impermanent loss”?

The core answer to all of these questions points to one term: AMM (Automated Market Maker).

Today, we’ll explain AMM thoroughly — from the underlying logic to its limitations to its future trajectory — in the most understandable way possible.

https://news.superex.com/articles/23181.html

Imagine Crypto Trading from 2014–2017

Back then:

• If you wanted to trade tokens, you had to use a centralized exchange (CEX).
• Trading fully depended on an order book.
• No one posts a sell order? You can’t buy.
• No one posts a buy order? You can’t sell.

The typical matching method was:

• Buy orders: how much someone is willing to pay
• Sell orders: how much someone is willing to accept
• The exchange system matches them

This is the order book model, and it had many problems:

❌ 1. Liquidity was fragmented — if no one placed orders for a new token, it simply had no market.
❌ 2. Market-making was expensive, requiring professional market makers to maintain buy and sell depth.
❌ 3. Markets could be manipulated easily, with tricks like “pulling the plug,” flash crashes, fake order spoofing, etc.
❌ 4. Everything was stored in centralized exchanges, so users had no true asset ownership and security was limited.

Therefore, in decentralized exchanges, the order book model simply does not work because:

• On-chain matching is too expensive
• Posting orders is too slow
• Updating order books on-chain is extremely inefficient

So AMM was born — and with one simple idea, it overturned the entire trading model:A counterparty is no longer needed. You trade against a “liquidity pool.”

Essential Things About AMM

1. The Core Magic of AMM: The Liquidity Pool

The breakthrough invention of AMM was combining all tradable assets into a single pool.

For example, in an ETH/USDT liquidity pool:

• Person A deposits ETH
• Person B deposits USDT
• Person C deposits both ETH + USDT
• Person D only wants to earn fees and also deposits both tokens

All contributions form a shared inventory called a liquidity pool (LP Pool).

• If you want to buy ETH, you deposit USDT into the pool, and the pool gives you the equivalent amount of ETH at the current price.
• If you want to sell ETH, you deposit ETH into the pool, and the pool gives you USDT at the current price.

Something magical happens here — as a trader, you realize:

• No need for a counterparty
• No need for order placement
• No need for a market-making team
• No waiting at all

The pool is your counterparty. And the more trading happens, the more the pool earns because fees are distributed to all LPs proportionally.

This is why AMM trades execute instantly.

2. The Soul of AMM: x * y = k

Uniswap used an extremely simple formula that changed the entire industry:

TokenA_amount × TokenB_amount = constant_k， This is the Constant Product Market Maker model.

Example:

Suppose an ETH/USDT pool is initialized with:100 ETH = 100,000 USDT，Initial price = 100,000 / 100 = 1,000 USDT/ETH.Thus k = 100 × 100,000 = 10,000,000

If you buy 1 ETH from the pool, ETH decreases to 99, and to maintain x*y=k, USDT must increase to around 101,010.1.

This causes the price of ETH to rise slightly.The more aggressive the trading, the more drastic the price moves.

This results in the classic effects:

• “The more you buy, the more expensive it gets”
• “The more you sell, the cheaper it gets”

This is also why AMM prices adjust automatically.

How Does AMM Make Money? — Fees + MEV + Arbitrage

AMMs replace traditional market makers with automated algorithms, allowing anyone to deposit liquidity and become an LP, earning fees and on-chain incentives.

But why can AMMs run sustainably? Where does “profit” actually come from?There are three engines:Trading Fees、MEV Capture and Arbitrage-Based Price Realignment.

Let’s break them down.

1. Trading Fees — The Primary Source of LP Income

Most AMMs (Uniswap v2/v3, PancakeSwap, Curve) charge a fixed percentage fee:

• 0.3% (most common)
• 0.05% (stablecoin pools)
• 0.1% (some lightweight AMMs)

These fees do not go to the platform — they go entirely to LPs.

Meaning:The higher the trading volume, the higher the LP returns.If a pool has $20M in daily trading volume, with a 0.3% fee:LP Daily Revenue = $20M × 0.3% = $60,000.Thus, AMM’s ceiling depends heavily on volume + liquidity depth.

2. Arbitrage: The Invisible Engine That Keeps AMM Prices Accurate

The price of an AMM is automatically calculated by formulas (such as x*y = k), and does not synchronize directly with external markets. Once a deviation appears, arbitrage opportunities emerge:

• When the ETH price in the AMM is lower than on the CEX → arbitrageurs buy on the AMM and sell on the CEX；
• When the ETH price in the AMM is higher than on the CEX → arbitrageurs buy on the CEX and sell on the AMM；
• Arbitrage itself = arbitrageurs make money + the AMM automatically returns to its fair price.

This brings two structural benefits:

① The AMM does not need manual intervention to maintain price stability

• Traditional markets require market makers to constantly adjust buy and sell orders;
• AMMs rely entirely on arbitrageurs to automatically correct prices.

② Arbitrageurs take on the role of “liquidators”

An AMM will never allow prices to drift infinitely, because arbitrageurs will always step in to buy low and sell high until both sides return to equilibrium. This is why arbitrageurs are called the AMM’s Natural Market Maker.

Through their actions, they maintain the long-term stability of the economic system.

3. LP Incentives — Extra Earnings Beyond Fees

To attract more liquidity, many AMMs also provide additional incentives:

• platform token rewards
• liquidity mining
• staking rewards
• ecosystem airdrops

This forms a flywheel effect:Liquidity → Better trading → Higher volume → Higher fees → More LPs

Summary of AMM Revenue Sources

(1) Trading Fees — Stable base income
(2) Arbitrage — Keeps pricing fair, enabling more trading
(3) Incentives — Boosts LP returns

SuperEx Free Market AMM

SuperEx’s AMM calculates buy and sell prices based on formulas, providing continuous quotes for the market. In terms of trading mechanisms, SuperEx adopts a combined AMM + order book model, where the system automatically converts the liquidity pool into an order book to offer users a better trading experience.

AMM is widely used in the blockchain decentralized finance (DeFi) ecosystem and is one of the core technologies behind decentralized exchanges (DEX) such as Uniswap, SushiSwap, and Curve.

How Is AMM Different From Traditional Market-Making Methods?

In traditional financial markets, market makers maintain liquidity by providing buy and sell quotes, while AMMs achieve automated liquidity provisioning through smart contracts and preset algorithms, enabling trades to execute autonomously while maintaining relatively stable liquidity. Below are the main differences:

1. Liquidity Provision Method

• Traditional market making: Liquidity is provided by professional market makers, typically using complex algorithms and market strategies to place orders on both the buy and sell sides, earning profits from the bid-ask spread.
• AMM: Decentralized — any user can become a liquidity provider (LP) by depositing funds into a liquidity pool, earning trading fees without requiring professional knowledge.

2. Pricing Mechanism

• Traditional market making: Prices are driven by the order book. Buy and sell orders are manually matched according to market supply and demand.
• AMM: Prices are dynamically calculated through algorithmic formulas (such as Uniswap’s x * y = k). No order book is required, transactions complete instantly, and users do not need to wait for a counterparty.

3. Liquidity Efficiency

• Traditional market making: Liquidity depends on the strategies of professional market makers; during periods of high market volatility, liquidity shortages may occur.
• AMM: Liquidity pools are always available, but when one asset in the pool becomes severely imbalanced, large slippage may occur.

4. Applicable Scenarios

• Traditional market making: Primarily used in centralized exchanges (CEX), suitable for users engaged in high-frequency trading and complex order types.
• AMM: Mainly applied in decentralized exchanges (DEX), lowering participation thresholds and attracting more everyday users.

5. Revenue Distribution

• Traditional market making: Revenue goes exclusively to market makers; ordinary users cannot directly participate.
• AMM: Liquidity providers earn transaction fees by depositing funds, allowing anyone to participate and share revenue.

With AMM, You Can Earn Fee Share in Just 3 Steps — In 1 Minute!

In practical use, users only need three steps to start earning liquidity rewards:

1. Log in to the SuperEx platform;
2. Select the target token pair;
3. Deposit the token and USDT into the liquidity pool and begin earning revenue.

No large capital is required, no complex API setup is needed, and no professional market-making team is necessary. Any user can get started within one minute — enabling ordinary users to easily participate in liquidity market-making.

Appendix: AMM Glossary (20 Terms)

1. AMM — Automated market maker
2. LP — Liquidity provider
3. k-value — Constant in constant product formula
4. Slippage — Difference between expected and actual execution price
5. Impermanent loss — Temporary loss from volatile price movements
6. Liquidity pool — Smart contract holding token pairs
7. Stablecoin pool — Low-slippage pool for pegged assets
8. Liquidity mining — Token rewards for providing liquidity
9. Price oracle — External market price feed
10. Concentrated liquidity — LPs provide liquidity only within chosen price ranges
11. Dynamic fee — Fee adjusts automatically based on volatility
12. Token pair — Two assets in a liquidity pool
13. Cross-chain AMM — AMM supporting assets across multiple chains
14. Perpetual AMM — AMM integrated with derivatives pricing
15. Aggregated trading — Routing through multiple AMMs for best execution
16. Capital efficiency — Liquidity utilization across price ranges
17. MEV — Miner Extractable Value
18. RWA — Real-world assets tokenized on-chain
19. Protocol-Owned Liquidity — Liquidity owned by the protocol itself
20. Impermanent gain — When impermanent loss reverses into profit if prices revert

Conclusion: AMM Reshapes the Boundaries of Finance

AMM freed blockchain trading from human limitations and redefined the nature of “markets.” It hands trust to code, pricing to algorithms, and liquidity to the participants.

In traditional markets, market makers are few; in an AMM world, everyone can become a market maker.This is the beauty of decentralized finance (DeFi) — everyone can become part of the market, and everyone can empower liquidity.