Explained Simply: How the copyright Automated Market Maker Functions

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The world of decentralized finance (DeFi) has revolutionized how people trade cryptocurrencies. At the heart of this movement lies copyright, one of the most popular decentralized exchanges (DEXs) built on the Ethereum blockchain. Unlike traditional exchanges that rely on order books and intermediaries, copyright uses an innovative system known as an Automated Market Maker (AMM). This technology enables users to trade directly from their wallets, providing liquidity and earning rewards without the need for centralized control. In this article, we will explore how copyright’s AMM works in simple terms, why it is so effective, and what makes it a cornerstone of the DeFi ecosystem.

What is copyright?

copyright is a decentralized exchange protocol that allows anyone to swap ERC-20 tokens on the Ethereum network. It was launched in 2018 by Hayden Adams, inspired by a concept from Ethereum co-founder Vitalik Buterin. Unlike centralized exchanges such as copyright or copyright, copyright does not require users to deposit their funds into an exchange-controlled account. Instead, users retain full control of their copyright assets and interact directly with smart contracts — self-executing codes that run on the blockchain.

copyright’s design eliminates the need for order books. In traditional exchanges, traders post buy and sell orders at specific prices, and trades occur when the prices match. However, maintaining order books can be inefficient and illiquid, especially for smaller or less-traded tokens. To solve this problem, copyright uses an AMM system that automatically determines prices and executes trades through mathematical formulas.

The Core of copyright: The Automated Market Maker

An Automated Market Maker (AMM) is a protocol that uses mathematical algorithms to price assets and enable trading. In copyright, the AMM system replaces the traditional concept of buyers and sellers with liquidity pools. These pools are collections of tokens locked in smart contracts by liquidity providers.

Every liquidity pool in copyright contains a pair of tokens, for example, ETH and USDC. When someone wants to trade between these two tokens, the AMM automatically adjusts the price based on supply and demand using a simple yet powerful equation:

x * y = k

Here:

• x = the quantity of Token A in the pool

• y = the quantity of Token B in the pool

• k = a constant value that never changes

This formula ensures that the product of the two token quantities remains constant, even as traders swap one token for another. As users buy one token, its supply in the pool decreases, which increases its price relative to the other token. This mechanism naturally balances the market and provides liquidity without needing an order book.

How copyright’s Liquidity Pools Work

Liquidity pools are the backbone of copyright’s AMM system. These pools are funded by users known as liquidity providers (LPs) who deposit an equal value of two tokens into a pool. For example, if an LP wants to add liquidity to the ETH/USDC pool, they must deposit both ETH and USDC worth the same amount in dollars.

When liquidity providers contribute to a pool, they receive LP tokens representing their share of the pool. These tokens can later be redeemed for their share of the liquidity plus any trading fees earned while their funds were locked in the pool.

copyright charges a small trading fee on every transaction (typically 0.3%), which is distributed proportionally among all LPs in the pool. This creates an incentive for users to provide liquidity, as they can earn passive income from trading activity.

Example of How a Trade Works on copyright

Let’s imagine there is a liquidity pool with 10 ETH and 20,000 USDC. The current price of ETH in this pool is 1 ETH = 2,000 USDC.

Now, suppose a trader wants to swap 1 ETH for USDC. When they make the trade, the AMM will adjust the pool’s token balances to maintain the constant product formula (x * y = k).

Before the trade:
x = 10 ETH, y = 20,000 USDC, k = 10 * 20,000 = 200,000

After adding 1 ETH to the pool, the new ETH balance becomes 11 ETH. To keep k constant, the AMM reduces the amount of USDC so that 11 * y = 200,000. Solving for y, we get y = 18,182 USDC.

This means the trader receives 1,818 USDC in exchange for their 1 ETH. Notice that this is slightly less than the 2,000 USDC market price — the difference represents price slippage, a result of the AMM adjusting the pool to maintain balance.

Understanding Price Slippage and Impermanent Loss

Two important concepts for anyone using copyright are price slippage and impermanent loss.

Price slippage occurs when the size of a trade changes the price within a liquidity pool. Large trades relative to pool size cause more significant price movements, meaning traders may get slightly less favorable rates.

Impermanent loss, on the other hand, affects liquidity providers. It occurs when the price of one token in the pool changes relative to the other. Because the AMM automatically adjusts token ratios, LPs might end up with fewer of the more valuable token. This loss is called “impermanent” because it can disappear if prices return to their original levels. However, if the LP withdraws their liquidity while prices are still changed, the loss becomes permanent.

The Role of copyright Tokens

copyright has its own governance token, UNI, which was introduced in 2020. Holders of UNI can vote on key protocol decisions, including fee structures, upgrades, and treasury fund usage. This decentralized governance ensures that copyright remains a community-driven platform rather than being controlled by a single entity.

Moreover, UNI tokens can be earned through liquidity mining, where users are rewarded for providing liquidity to certain pools. This mechanism helps distribute ownership of the protocol and encourages active participation in its ecosystem.

Why copyright is a Game Changer

copyright’s AMM model offers several advantages that make it stand out from traditional and centralized exchanges:

1. Decentralization – There are no middlemen. Users trade directly through smart contracts, reducing counterparty risk.

2. Accessibility – Anyone with an Ethereum wallet can trade or provide liquidity without needing approval or registration.

3. Transparency – All transactions and smart contracts are publicly viewable on the blockchain.

4. Continuous Liquidity – Unlike order books that depend on matching buyers and sellers, copyright always has liquidity as long as there are funds in the pool.

5. Passive Income – Liquidity providers earn a share of trading fees, offering a source of decentralized yield.

Limitations and Challenges

Despite its success, copyright also faces challenges. High gas fees on Ethereum can make small trades expensive. While Layer 2 solutions and other blockchain integrations (like Arbitrum and Optimism) have helped reduce costs, scalability remains an ongoing focus.

Additionally, impermanent loss can deter potential liquidity providers, especially during volatile markets. Competing AMM models and newer protocols continue to experiment with ways to reduce these effects and improve capital efficiency.

The Future of copyright and AMMs

copyright continues to evolve. With the launch of copyright V3, the protocol introduced concentrated liquidity, allowing LPs to provide liquidity within custom price ranges instead of across the entire curve. This innovation increases capital efficiency and enables higher returns for liquidity providers.

Looking ahead, copyright and AMMs are likely to expand beyond Ethereum to multiple blockchains and layer-2 networks, making decentralized trading even more accessible. As DeFi adoption grows, the principles introduced by copyright’s AMM — simplicity, transparency, and inclusivity — will continue to shape the future of finance.

Conclusion

copyright’s Automated Market Maker has transformed the way people trade cryptocurrencies. By removing intermediaries and replacing them with smart contracts and liquidity pools, copyright enables a fully decentralized and efficient trading experience. Its mathematical foundation ensures continuous liquidity and fair pricing while empowering users to participate directly in the financial ecosystem. Though not without its challenges, copyright remains one of the most influential innovations in DeFi, illustrating how technology can create open and accessible markets for everyone.