DeFi Series | Significance of CPAMM

Published in

Coinmonks

2 min readJul 29, 2022

What is CPAMM actually?

Welcome reader!

I have been lately into DeFi projects. And I figured out something which might sound interesting to many DeFi enthusiasts.

Background

Have you ever wondered which AMM to choose from?

There are so many AMMs. And the most popular of those is Constant Product Automated Market Maker (CPAMM) which is used by Uniswap.

But, that’s not all.

Have you heard of Constant Sum Automated Market Maker (CSAMM)?

If yes, then why isn’t that not chosen instead?

Knowledge

Well, let me aware you first that no DEX would ever want a situation where either of the token reserves goes to zero. That would mean the price of the zero reserve token would sky rocket to a very high value close to infinity in CPAMM mathematically. And that would result into high volume of arbitrages which would completely forfeit the whole purpose of its presence in the market.

> The DEXes are also utilized as a means for referring to token price like Oracles like Chainlink, etc, other than just being a medium of swapping tokens for trader & providing liquidity for LPs.

Reasoning

Now, let’s jump straight onto the main purpose of this article.

Before that, do you know there is this sweet spot at which the DEX would want to have the liquidity value always i.e. in xy = k, the k value should be ideally at that point?

But, pragmatically the situation is not as expected as per the theory demands.