CPMM

Constant Product AMM (CPMM)

Mathematical Foundation and Implementation

CPMM implements the fundamental invariant: x × y = k, where x and y represent reserve balances of two assets, and k remains constant across all trading operations.

This model provides predictable, continuous liquidity across all price levels, making it particularly suitable for assets with uncertain price ranges or for liquidity providers seeking simplified position management.

Operational Characteristics

Technical Advantages:

  • Algorithmic Simplicity: Straightforward implementation with predictable behavior patterns

  • Continuous Availability: Guaranteed liquidity provision at all price levels without gaps

  • Operational Resilience: Stable performance under various market conditions and volatility scenarios

Inherent Limitations:

  • Capital Inefficiency: Uniform distribution across infinite price range results in suboptimal capital utilization

  • Slippage Impact: Large trades experience significant price impact due to distributed liquidity

  • Strategy Constraints: No customization options for specific price range optimization

Performance Analysis

Execution Example: Pool State: 1,000 BTC × 100,000 Runes (k = 100,000,000)

For a trade selling 50 BTC:

  • Post-trade BTC balance: 1,050 BTC

  • Post-trade Runes balance: 100,000,000 ÷ 1,050 = 95,238.10 Runes

  • Runes received: 4,761.90 Runes

  • Average execution price: 95.24 Runes per BTC

  • Price impact: 4.76%

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