Traditional markets match a buyer’s bid with a seller’s ask. Automated market makers replace that queue with two reserves and a formula. The pool is always willing to quote, provided a trader accepts the price implied by changing those reserves.
Liquidity becomes inventory
People who fund a pool supply both assets. Trades move the balance away from its starting ratio, and arbitrageurs pull the price back toward the wider market. Fees compensate providers for lending inventory to this process.
Price impact is visible scarcity
A large trade moves a shallow pool more than a deep one. That movement is not a hidden charge; it is the curve revealing that little inventory is available near the current price.
An AMM makes liquidity programmable, but it cannot make liquidity appear.
The provider takes the other side
When one asset rises sharply, the pool automatically sells some of it and accumulates the falling asset. That rebalancing can leave a provider with less value than simply holding both assets, even after fees. The mechanism is elegant, but the risk never vanished—it changed owners.