# 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  If the market price moves outside an LP’s selected range, their liquidity is no longer active, meaning **no fees are earned** until the price moves back or the position is adjusted.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.**