A constant product market maker is an automated pricing formula that holds two pooled reserves and keeps the product of their amounts constant, so each trade shifts the pool and sets a new price.
Last reviewed 19 August 2025 · Educational, not advice
A constant product market maker is a way of pricing trades automatically, without an order book and without anyone posting individual quotes. Instead of matching buyers to sellers, it holds a pool of two assets and follows one simple rule: the two amounts, multiplied together, must always equal the same number. That number is the constant in the name. When someone trades against the pool, they add to one side and take from the other, and the formula adjusts the price so the product of the two reserves stays fixed. It is a common building block in on chain automated markets, including some that run prediction style contracts.
The mechanics follow from that rule. Call the two reserves x and y, and the constant k, so the pool enforces x times y equals k. If you want to take some y out of the pool, you have to put in enough x that the product still equals k. Because of the shape of that relationship, the price you pay is not fixed. As one reserve gets smaller the curve steepens, so each additional unit costs more than the last. That is why a constant product market maker always has a quote available as long as the pool holds funds, but the effective price worsens the more you try to take in a single trade.
This is a different model from a central limit order book, where the price comes from real buy and sell orders that people have placed and the platform matches them. A constant product market maker replaces that with a formula and a pool. Liquidity is supplied by people who deposit assets into the reserves rather than by traders resting orders at chosen prices. The upside is that there is always a price and you never wait for a counterparty. The trade off is that the price moves along a curve, so the larger your trade relative to the pool, the more the price slips against you, an effect known as slippage.
The design carries real risks that are worth understanding before you rely on it. Thin pools move sharply for a given trade size, so a small pool can give a poor price even on a modest order. People who supply the reserves can suffer impermanent loss, a shortfall that appears when the relative prices of the two pooled assets move after they deposit. Because these pools usually run on chain, they also carry smart contract risk and depend on how the underlying contract settles. None of these mechanics make any trade safe or any price correct, and we never name a contract or a pool to use.
Suppose a pool holds one hundred units of x and one hundred units of y, so the product k is ten thousand. You want to take ten units of y out. To keep the product at ten thousand, the x reserve must rise to about one hundred and eleven, so you must add roughly eleven units of x for the ten units of y you receive. Take out more in one go and the rate gets steadily worse, because the curve steepens as the y reserve falls.
Illustrative only. Numbers are simplified, exclude fees, and are not a quote or a prediction.
An automated formula always gives a price, but that does not make the price right or the trade safe. Slippage, thin pools, impermanent loss, and smart contract risk are all real. Prediction markets can lose you money. Stake only what you can afford to lose, never to chase a loss, and never on borrowed money. If it stops feeling like a free choice, step back. In the United States you can call or text the helpline on 1-800-GAMBLER or visit ncpgambling.org.
A constant product market maker is an automated pricing formula that holds two pooled reserves and keeps the product of their amounts constant. When someone trades, one reserve grows and the other shrinks so the product stays the same, and that shift sets the new price. It is a common design in on chain automated markets.
The pool holds two assets, x and y, and enforces that x times y equals a constant k. A trade that takes some y out must put enough x in to keep the product equal to k. Because the curve steepens as a reserve runs low, larger trades move the price more, which produces slippage.
An order book matches individual buy and sell orders from people. A constant product market maker has no order book. It prices every trade from the pool balances using its formula, so liquidity comes from the pooled reserves rather than from resting orders, and there is always a quote as long as the pool holds funds.
Large trades face slippage because the price moves along the curve. Thin pools move more for the same size. People who supply the reserves can face impermanent loss when prices shift, and on chain pools also carry smart contract and settlement risk. None of this makes any trade safe, and we never name a contract or pool to use.
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