> For the complete documentation index, see [llms.txt](https://docs.arcadia.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.arcadia.finance/introduction/concepts/automated-market-makers.md). # Automated Market Maker (AMM) Automated Market Makers (**AMMs**) are smart contracts that enable decentralized trading without an order book. Instead of matching buyers and sellers, AMMs use liquidity pools—funded by liquidity providers (LPs)—to facilitate trades Traditional **virtual Automated Market Makers (vAMMs)** distribute liquidity across all possible prices, ensuring continuous trading but leading to **capital inefficiency**. Most liquidity remains unused, especially for stable or correlated asset pairs. **Concentrated Liquidity Automated Market Makers (clAMM)** solve this by allowing liquidity providers (LPs) to allocate funds within a specific price range. This makes capital more efficient and increases fee earnings, but it comes with trade-offs. * **No Yield When Out of Range**\ If the market price moves outside an LP’s selected range, their liquidity is no longer active, meaning **no fees are earned** until the price moves back or the position is adjusted. * **Impermanent Loss (IL)**\ IL occurs when the relative price of assets in the pool changes, causing LPs to end up with more of the weaker-performing asset. In CL pools, **IL is amplified** when using narrow ranges, as price movements can quickly push positions out of range, forcing LPs to either take a loss or adjust their range at additional cost. While CL pools offer higher efficiency, they require **active management** to stay profitable. LPs must balance range size, rebalancing frequency, and market volatility to minimize risks. **This is where Arcadia comes in.** --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter, and the optional `goal` query parameter: ``` GET https://docs.arcadia.finance/introduction/concepts/automated-market-makers.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.