How does AMM work?

To begin with, DEX is the heart of the DeFi world, an exchange where all exchanges take place when the blockchain executes smart contracts automatically. Thanks to smart contracts DEX solutions do not store database information and make all transactions transparent - they can be tracked in the blockchain.

AMM (Automated Market Maker) is a complex system that provides automatic operation of DEX exchange. It is based on liquidity pools, from which the value of a coin is calculated.

Let's take the example of a modern DEX exchange on the TON blockchain - Ston.fi. Tokens in the pool still have to come from somewhere, here liquidity providers come into play, they contribute both coins of the pair to the liquidity pool, and are rewarded for this with special LP tokens, which prove that their funds are in the pool. By the way, on @ston_fi LP tokens can also be locked to get additional rewards. Further, the formula A * B = K is used to calculate the value of a token, where K is the constant of the ratio of tokens in the pool, A is the value of token 1, B is the value of token 2.

When exchanging on the exchange, the user pays a commission, which is distributed among LP token holders, due to this fact, liquidity pools are becoming popular.

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