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• No Yield When Out of Range If the market price moves outside an LP’s selected range, their liquidity is no longer active, meaning no fees are earned until the price moves back or the position is adjusted.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.