AMM basics: how pool pricing works
AMMs price swaps from pool balances. When you trade, you change the reserves—so the next price changes.
Intuition without math
Imagine two buckets: token A and token B. If you buy B, you put A in and take B out. B becomes scarcer, so it costs more A per B for the next trade.
Price impact vs slippage
- Price impact: how much your trade moves the pool price.
- Slippage: your tolerance for movement between quote and execution.
Why liquidity depth matters
Deep liquidity keeps price impact small. Thin liquidity can make quotes look attractive, then collapse at execution.
Practical next step: see Fees, gas, slippage.
Why routes sometimes use multiple pools
The best price is not always in the most obvious pool. Routers can split your trade or route through an intermediate token to reduce price impact.
Heuristics you can use
- If price impact looks large, reduce trade size or find deeper liquidity.
- If a pair is volatile, expect slippage requirements to rise during fast moves.
- If a quote looks unusually good, verify the token and check liquidity depth.
Quick example
A small pool can show a “nice” quote for a tiny amount, but the price can move sharply as size increases. That’s price impact in action. Always look at minimum received, not just the headline price.
The curve behind the scenes
Many AMMs use a “constant product” style curve: as you remove one asset, it becomes scarcer in the pool, so the marginal price rises. The result is intuitive: the bigger your trade relative to liquidity, the worse your average execution price becomes.
Why small pools feel “slippery”
In a shallow pool, even modest swaps change reserves a lot, which pushes the price quickly. In deeper pools, reserves barely move, so quotes are steadier. If you see large price impact, it’s a liquidity signal — not a UI bug.
Good habits
- Prefer deeper pools for meaningful size.
- Be cautious with brand‑new tokens where liquidity is thin.
- Use minimum received as your guardrail.