What Is an AMM?
An Automated Market Maker (AMM) is a smart contract that allows token swaps without a traditional order book. Instead of matching buyers and sellers, AMMs use a mathematical formula to price tokens based on pool ratios.
The x * y = k Formula
The most common AMM formula is: x × y = k where x and y are the quantities of two tokens in the pool, and k is a constant. When someone buys token X, the ratio shifts and the price of X increases automatically.
What Are Liquidity Pools?
Liquidity pools are pairs of tokens locked in a smart contract. For example, a BNB/USDT pool holds both BNB and USDT. When a user swaps BNB for USDT, they add BNB and remove USDT from the pool.
How Do LPs Earn Fees?
Liquidity providers (LPs) earn a percentage of every swap that happens in their pool. On a white-label DEX with the Premium plan, some of those fees can also go to the DEX owner.
Impermanent Loss
LPs face "impermanent loss" when the price ratio of their deposited tokens changes significantly. This is offset by trading fees in high-volume pools.
Why This Matters for DEX Owners
As a DEX owner, deep liquidity pools attract more traders and generate more volume — which means more fees. Building liquidity is one of the key growth strategies for any DEX launch.