SuperEx Guide: Listing in the Free Market（III）

#SuperEx #Guide #AMM

At the end of our previous guide, we briefly introduced the SuperEx Free Market AMM feature. At the time, however, it wasn’t the main focus, so we didn’t explore it in depth. In today’s guide, it’s AMM’s turn to take center stage as we dive deeper into the SuperEx Free Market ecosystem.

To truly understand the SuperEx Free Market AMM, we first need to start with the market itself.

If you have spent enough time in the crypto market, you may have noticed something fascinating: on a decentralized exchange, or DEX, you can generally buy or sell any supported token whenever liquidity is available.

What makes this even more interesting is that you are not trading directly with one specific person.

There is no need to wait for a counterparty or for another user to place a matching order. The moment you submit a trade, the system generates a quote and settles the transaction on-chain.

This raises several important questions:

Who matches these trades?
Who provides the quotes?
How can an unattended DEX operate around the clock?
How does it determine the price of each trade?
Why do tokens such as X2Y2, UNI, and PEPE become progressively more expensive when users rush to buy them during a bull market?
Why can users earn trading fees simply by depositing tokens into a pool?
Why do people say that providing liquidity can result in losses — and what exactly is “impermanent loss”?

The answer to all these questions revolves around one concept: AMM — Automated Market Maker.

What You Need to Know About AMMs

1. The Core Mechanism of an AMM: The Liquidity Pool

One of the AMM’s most important innovations is the pooling of tradable assets in a shared reserve.

Consider an ETH/USDT liquidity pool:

User A deposits ETH
User B deposits USDT
User C deposits both ETH and USDT
User D also deposits both assets to earn a share of the trading fees

Together, these deposited assets form a shared inventory known as a liquidity pool.

When users trade through the pool:

To buy ETH, a user deposits USDT into the pool and receives an amount of ETH determined by the AMM’s pricing curve
To sell ETH, a user deposits ETH into the pool and receives an amount of USDT determined by the same mechanism

This structure allows traders to execute transactions:

Without waiting for a traditional counterparty
Without placing orders in an order book
Without relying on a conventional market-making team to quote prices continuously
Without unnecessary delays, provided that sufficient liquidity is available

The liquidity pool itself effectively acts as the counterparty.

The more trading activity a pool generates, the more transaction fees it will generally collect. These fees are distributed among its liquidity providers, or LPs, according to the protocol’s rules.

That is why an AMM can generate a quote and execute a swap as soon as the user submits the transaction.

2. The Formula at the Heart of an AMM: x × y = k

Uniswap transformed the industry with an exceptionally simple formula: Amount of Token A × Amount of Token B = Constant k

In other words: x × y = k

This model is known as a Constant Product Market Maker.

Consider a simple example.

Suppose an ETH/USDT liquidity pool initially contains:

100 ETH
100,000 USDT

The pool’s initial reference price is：100,000 ÷ 100 = 1,000 USDT per ETH

Its constant product is：k = 100 × 100,000 = 10,000,000

If a user buys 1 ETH from the pool, its ETH reserve decreases to 99 ETH.To preserve x × y = k in a simplified model that excludes transaction fees, the USDT reserve must increase to: 10,000,000 ÷ 99 ≈ 101,010.10 USDT

The user would therefore need to add approximately 1,010.10 USDT to withdraw 1 ETH. Once the trade is completed, the price of ETH relative to USDT in the pool will have increased.

The more ETH users remove from the pool, the less ETH remains and the higher the average price of subsequent purchases becomes. Conversely, large ETH sales increase the pool’s ETH reserve and reduce its relative price.

This explains two familiar market phenomena:

The more users buy, the more expensive the asset becomes
The more users sell, the cheaper the asset becomes

This is how an AMM automatically adjusts its price according to the changing ratio of assets in the pool.

How Does an AMM Generate Returns?

The core idea behind an AMM is to use an automated algorithm in place of traditional market making. Eligible users can deposit assets into a liquidity pool, become LPs, and potentially earn trading fees and other on-chain incentives.

But what keeps an AMM running over time? Its economic model is primarily supported by three components:

Transaction fees
Price correction driven by arbitrageurs
Liquidity incentives offered by the platform

Let us examine each component in greater detail.

1. Transaction Fees: A Primary Source of LP Revenue

Most AMMs, including protocols such as Uniswap, PancakeSwap, and Curve, charge a percentage-based fee on trades. Depending on the protocol, pool, and asset type, common fee tiers may include:

0.3%
0.05%
0.1%

Actual fee rates and distribution arrangements depend on the settings and rules of the relevant protocol and liquidity pool.

These fees are generally distributed, either fully or partially, among LPs according to the protocol’s rules. The larger an LP’s share of the pool, the greater the portion of fee revenue they will typically receive.

This means that, all else being equal, higher trading volume will generally generate more fee income for liquidity providers.

An AMM does not need to predict market sentiment, nor does it require a manager to adjust prices manually. Trades and fee distributions can be executed automatically by on-chain smart contracts under predefined rules.

Consider a straightforward example:

If a liquidity pool processes USD 20 million in trading volume in one day and charges a 0.3% fee, the total fees generated that day would be: USD 20 million × 0.3% = USD 60,000

This USD 60,000 represents the pool’s total gross fee revenue — not necessarily the net return earned by any individual LP. The actual distribution depends on the protocol’s rules, each LP’s share, the selected liquidity range, asset-price movements, and other factors.

The revenue potential of an AMM and its LPs therefore depends heavily on trading volume, liquidity depth, and capital efficiency.

2. Arbitrageurs: Bringing AMM Prices Back into Alignment

Prices inside an AMM are calculated by formulas such as x × y = k, based on the ratio of assets held in the pool. They are not synchronized directly or automatically with prices in external markets.

Whenever a price difference emerges between an AMM and another market, an arbitrage opportunity may arise:

If ETH is cheaper in the AMM than on a centralized exchange, or CEX, an arbitrageur can buy ETH from the AMM and sell it on the CEX
If ETH is more expensive in the AMM than on the CEX, an arbitrageur can buy ETH on the CEX and sell it through the AMM

Arbitrageurs seek to profit by buying in the lower-priced market and selling in the higher-priced one. In the process, their trades push the AMM price back toward the broader market price.

This mechanism provides two major benefits.

① AMMs Do Not Require Continuous Manual Price Management

Traditional order-book markets generally rely on market makers to adjust bid and ask quotes continuously. AMMs use algorithmic pricing, while arbitrageurs help align pool prices with external markets by trading on price differences.

② Arbitrageurs Act as Price Correctors

When a sufficiently large price gap develops between markets, arbitrageurs continue buying from the lower-priced venue and selling on the higher-priced venue until the difference is no longer large enough to cover transaction fees, gas costs, and other expenses.

Arbitrageurs can therefore be viewed as a natural market-making force within the AMM ecosystem. While pursuing their own profits, they also help maintain price alignment across markets.

It is important to note that arbitrage primarily helps restore market pricing; arbitrage profits are not automatically distributed to LPs. Although arbitrage trades can generate fees for LPs, they may also contribute to portfolio rebalancing and impermanent loss.

3. LP Incentives: Additional Returns Beyond Trading Fees

To attract additional liquidity, many AMM platforms provide LPs with incentives beyond trading fees, such as:

Platform-token rewards
Liquidity-mining rewards
Holding or staking rewards
Ecosystem airdrops

At their core, these programs use token incentives to attract capital into liquidity pools, improve market depth, and create network effects.

Under favorable conditions, this can produce a growth flywheel: More liquidity → Lower slippage and a better trading experience → Higher trading volume → More fee revenue → More LP participation.

However, platform-token and liquidity-mining rewards are affected by token prices, emission schedules, and changing market supply and demand. They should therefore not be treated as fixed or risk-free returns.

Summary: The Core Economic Mechanisms of an AMM

Overall, an AMM ecosystem is supported by three major economic mechanisms:

Transaction fees: The most direct and common source of revenue for LPs
Arbitrage and price correction: A process that helps align AMM prices with external markets while generating additional trading volume for the pool
Platform incentives: Token rewards, liquidity mining, and ecosystem incentives designed to increase potential returns and attract more liquidity

AMMs encode the market-making process into algorithms and smart contracts. Liquidity pools act as counterparties, prices adjust automatically according to asset ratios, and ordinary users have the opportunity to participate as liquidity providers.

Providing liquidity, however, does not produce risk-free returns. Fees and incentives must be evaluated alongside impermanent loss, token-price volatility, smart-contract vulnerabilities, and market-liquidity risks.

In the next guide, we will explore what makes the SuperEx Free Market AMM unique and how it differs from conventional AMM models.

About SuperEx

As the world’s first Web3-powered cryptocurrency exchange, SuperEx has remained committed to building the Web3 ecosystem. Over the years, it has introduced a comprehensive range of products and services, including SuperEx DAO, SuperEx Web3 Wallet, Super Start, SuperEx P2P, SuperEx Stock Markets, SuperEx Copy Trading, SuperEx Earn, and SuperEx DAO Academy, creating a full-spectrum ecosystem that spans every major sector of Web3.

Today, SuperEx serves over 10 million users, with a social media community of more than 600,000 followers across 166 countries and regions worldwide. The platform supports 1,000+ cryptocurrencies for both spot and futures trading. Seamlessly integrated with Super Wallet, SuperEx provides decentralized asset custody while combining the trading efficiency of a centralized exchange (CEX) with the security of a decentralized exchange (DEX).

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