What is AMM (Automated Market Maker)?

An automated market maker is a decentralized exchange that sets prices with a formula instead of an order book. Traders swap against a pool of two assets supplied by liquidity providers, and the pool’s formula, most famously x times y equals a constant, moves the price with every trade so that the pool can never run out of either asset. There are no bids and asks and no counterparty; there is a contract and a curve.

Liquidity providers deposit both assets in proportion and receive a share of every swap fee. In exchange they accept impermanent loss: as the price of one asset moves relative to the other, the formula sells the winner and buys the loser on their behalf, so their share ends up worth less than holding would have been. Whether providing liquidity pays is fees earned against that loss over the period.

Concentrated liquidity, introduced by Uniswap V3, lets a provider place liquidity only within a chosen price range. Inside the range the position earns far more fees per dollar; outside it the position stops earning and sits entirely in one asset. It turns liquidity provision from a passive deposit into something closer to a managed position.

For tracking, an LP position is not a token balance with a price. It is a claim on two underlying assets whose proportions change with the market, and it has to be valued as those assets. TrueHold reads AMM positions by protocol and values them that way; the impermanent loss calculator on this site shows the formula on your own numbers.

Price discovery on an AMM is a consequence of arbitrage rather than a feature of the pool. When the pool’s price drifts from the wider market, traders buy the cheap side until it matches, and their profit is the pool’s loss, which is paid by the liquidity providers. That flow is the same mechanism as impermanent loss, seen from the other side.