An automated market maker lets users swap against assets held in smart-contract liquidity pools. The pool’s formula and current balances determine the quoted exchange rate.
A swap changes the pool price
Removing one asset and adding another changes their balance in the pool. Larger trades relative to available liquidity generally move the execution price more.
Every liquidity pool is a separate market
The same token pair may have several pools with different fee tiers, contracts, and liquidity. A router can split or redirect trades between them.
Liquidity providers take market risk
Providers may earn swap fees, but the value of their position changes with token prices, trading volume, fee settings, and the range in which liquidity is active.
Fee income does not eliminate loss risk
Liquidity providers remain exposed to token price changes, smart-contract risk, inactive price ranges, and the opportunity cost of holding a different asset mix.
Sources
Educational information, not investment advice.