A constant function market is an automated market maker (AMM) where asset reserves in a liquidity pool maintain a constant product or sum, governed by a specific mathematical function. This function determines asset pricing and the amount of each asset available for trade. It enables continuous trading without requiring traditional order books. This design provides predictable liquidity for digital asset exchanges.
Context
The constant function market is a foundational element of many decentralized finance (DeFi) protocols, offering a novel approach to liquidity provision and price discovery. A critical discussion involves the trade-offs between different constant functions, such as constant product versus constant sum, regarding impermanent loss and capital efficiency. Future advancements will likely concentrate on hybrid models and dynamic functions that adapt to market volatility and trading volume.
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