AMM Overview
How does a DEX Determine Prices?
Traditional Centralized Exchanges (CEX) determine prices by stacking and matching buy and sell orders in an Order Book. In contrast, Decentralized Exchanges (DEX) like GIWATER use the AMM (Automated Market Maker) method. Prices are automatically determined based only on the quantity ratio of the two tokens deposited in a smart contract, with no order book required.
GIWATER provides three AMM models tailored to the characteristics of each trading pair.
AMM Models
A specialized model for exchanging assets whose prices are pegged to each other.
The standard x×y=k curve produces unnecessarily large slippage when the exchange ratio of two tokens is close to 1:1. The Basic Stable AMM curve is extremely flat near the 1:1 exchange ratio, dramatically reducing slippage for the same trade size.
Best for: USDC/USDT, DAI/USDC and other stablecoin pairs; stETH/ETH, WBTC/upBTC and other derivative token pairs of the same underlying asset.
The standard model used for exchanges between two general tokens.
x and y are the quantities of the two tokens in the pool, and k is a constant that is always maintained. When someone sells Token A, A increases in the pool and B decreases. To keep k constant, the unit price of B automatically rises.
The larger the liquidity pool (TVL), the more assets remain in the pool, so for the same trade size the constant is larger, which reduces price impact. This is why TVL is a key metric for DEX quality.
Best for: BTC/USDC, ETH/USDC, TER/USDC and other general token pairs with low price correlation.
An advanced model where LPs set a specific price range and concentrate liquidity only within that range.
In a standard AMM, liquidity is distributed uniformly across the entire price curve from zero to infinity. In contrast, a Concentrated Liquidity AMM (CLMM) allows LPs to specify a custom price range. For instance, an LP can provide liquidity for the ETH/USDC pair only between 2,600. By concentrating capital near the active market price, LPs achieve significantly higher capital efficiency and earn more trading fees with the same amount of assets.
Note that fee accrual pauses if the market price moves outside the specified range. This model requires active position management to remain effective, making it most suitable for users who can monitor their ranges strategically
Basic Mode vs Concentrated Mode (CLMM)
GIWATER offers two liquidity modes based on your experience level.
| Feature | Basic Mode | Concentrated (CLMM) |
|---|---|---|
| Target User | Beginners, passive strategy | Advanced, active strategy |
| Price Range | Full range (0 ~ ∞), auto | User-defined range |
| Capital Efficiency | Low | Significant increase |
| Management Needed | None (fully auto) | Yes (rebalance if out-of-range) |
| Out-of-Range Risk | None | Fees stop if price exits range |
| IL Risk | Low | Relatively Higher |
Concentrated Mode: Price Range Visualization
If the price exits your set range, fee income stops immediately. For volatile pairs, set a wider range or periodically rebalance your position.
Three AMM Models at a Glance
| Basic Stable AMM | Basic Volatile AMM | Concentrated Liquidity AMM | |
|---|---|---|---|
| Formula | x³y + y³x = k | x × y = k | Range-concentrated |
| Base Fee | 0.05% | 0.30% | 0.01% ~ 2.00% |
| Capital Efficiency | High (near peg) | Medium | Very High |
| Management Difficulty | Easy | Easy | Hard (position mgmt needed) |
| Recommended For | Beginners | Beginners | Experienced LPs |
| Best Assets | Stablecoins / pegged assets | General volatile pairs | All pairs |
Concentrated Liquidity AMM has the highest capital efficiency, but fee income stops the moment the price moves outside the set range. If you are new to liquidity provision, starting with Basic Stable AMM or Basic Volatile AMM is recommended.
How is a Pool Created?
A liquidity pool is created by depositing two types of tokens with equal value. For example, to participate in the $TER and $USDC pool, you must deposit them together in a 1:1 value ratio based on the current market price.
Once the deposit is complete, the user receives LP Tokens — a certificate saying “I own X% of this pool.”
Impermanent Loss (IL)
IL (Impermanent Loss) is a form of loss caused by “price ratio fluctuations” of assets deposited in a liquidity pool. It means that the asset value at withdrawal is temporarily lower than if you had simply held them (Hold).
IL is closer to a concept of opportunity cost. If the price returns to the time of deposit, IL becomes 0, and long-term accumulated swap fees and $TER emission rewards can offset (outperform) IL.
| Scenario | Extent of IL |
|---|---|
| Fixed Price Ratio | None (0%) |
| Token A Price ×2 | ~ −5.7% |
| Token A Price ×4 | ~ −20.0% |
| Stable-Stable Pair | Very Low |
Impermanent Loss (IL) is a natural phenomenon of the AMM structure. Actual profit/loss should be judged by comprehensively considering [Fee Income + Emission Rewards − Value Depreciation], rather than looking at IL alone.