AMM Basics for Beginners
Automated market makers replaced order books for many token pairs on blockchains. Instead of matching buyers and sellers directly, an AMM holds a pool of two tokens and prices trades using a formula. On Solana, Raydium, Orca, and Meteora all use AMM variants — each with different fee structures and liquidity models.
The constant-product formula
The simplest AMM maintains x × y = k, where x and y are token reserves and k is a constant. When a trader buys token A, they add token B and remove A. The product k stays the same (minus fees), which forces the price of A upward as its supply in the pool decreases.
Example: A pool holds 100 SOL and 10,000 USDC (k = 1,000,000). Buying 1 SOL removes SOL from the pool and adds USDC. The next SOL costs slightly more because the ratio changed.
Price impact and slippage
Small trades barely move the ratio. Large trades relative to pool size move it significantly — this is price impact. Slippage is the gap between the price you expected and the price you received. Aggregators like Jupiter split orders across pools to reduce slippage, but the underlying math remains.
How Solana AMMs differ from CEX order books
- Trades execute against pool reserves, not other users' resting orders
- Price is deterministic given current reserves — no bid-ask spread in the traditional sense
- Anyone can become a liquidity provider by depositing token pairs
- Transaction speed on Solana enables frequent arbitrage that keeps pool prices near external markets
Concentrated liquidity in brief
Standard pools spread your capital across all prices. CLMMs let you pick a range — useful when you expect price to stay within bounds, but risky if price exits your range. Our liquidity pool guide covers CLMM specifics.
Next steps
Browse our glossary for terms like impermanent loss and tick spacing. If the math still feels abstract, our liquidity workshop walks through paper calculations with real pool parameters.