Dynamic Fee AMM

Definition ∞ A Dynamic Fee AMM is an automated market maker that adjusts its transaction fees based on current market conditions. This protocol mechanism automatically modifies trading fees in response to factors such as asset volatility, trade size, or liquidity pool utilization. The adaptive fee structure aims to optimize returns for liquidity providers and mitigate impermanent loss during periods of market fluctuation. Such systems contribute to greater capital efficiency and stability within decentralized exchanges.
Context ∞ The implementation of dynamic fee mechanisms within automated market makers is a significant advancement in decentralized finance, seeking to enhance protocol sustainability. Debates often concern the optimal algorithms for fee adjustments, balancing user costs with liquidity provider incentives. Ongoing research focuses on refining these models to improve market depth and reduce slippage across various trading pairs.