Crypto Infrastructure
Nobody is on the other side. The pool is.
On a decentralised exchange there is often no order book at all. You swap against a pool of two assets that liquidity providers deposited in advance — and the price is nothing but the ratio between them, which your own trade changes as it executes.
The problem
Trade against the pool. Then watch it move under you.
Send USDC into an ETH/USDC pool and take ETH out. The ratio shifts, ETH becomes scarcer, and its price in the pool rises. Press a second time and your own first trade is what makes the second one worse. Then run the identical pair of trades against a pool ten times the size.
One pool, two chambers
ILLUSTRATIVE MODELYOUR OWN TRADES MOVED THE PRICE BY 0.0% SMALL POOL
Pool balances, the 20,000 USDC trade size and every price here are an invented model built to show the mechanism. No real pool, venue or price is being described.
The pool holds ETH and USDC. Press Send 20,000 USDC into the pool.
Nobody quoted you a price. The pool holds two assets and the price is the ratio between them, so the moment your USDC went in and ETH came out, ETH was relatively scarcer and its price in the pool was higher. Your second trade was identical in every way except one: it ran into a pool your first trade had already moved. That is the central fact of an automated market maker — you are not trading at a price, you are trading against a pool, and the trade itself is what changes the price you get.
Same two trades, same 20,000 USDC each time. In the larger pool they barely registered, because the size that matters is never the absolute size of your trade — it is your trade relative to the pool. A trade that is a tenth of a pool rearranges it; the same trade against ten times the liquidity moves the ratio about a tenth as far. That is the mechanical reason a deep pool gives you a fill close to the quoted price and a thin one does not: the slippage you met in the last lesson, seen from the inside.
Price impact after both trades, on the same scale.
The definition
Three things a pool actually is.
Tap each card. The third is the one most people have filed the wrong way round.
Hands on
Two ways to fill the same order.
Switch between the two machines and read the same six questions answered by each. The job is identical; almost nothing else is.
Liquidity pool
AMMAn order book needs someone to have posted the other side before you arrive. A pool does not: the capital was deposited in advance and the formula answers instantly, which is why these venues can trade around the clock. What you give up is the ability to name your price — the pool prices you off its own ratio, and your trade is part of what sets it.
The bridge
One swap, five steps.
This is the whole automated market maker, in order. Nothing else happens.
Pools replace the order book and open market infrastructure to anyone willing to supply capital and carry the risk that comes with it. Everything in this lesson happened inside a single chain, though — one pool, one network, one set of assets. The next lesson leaves that boundary behind and asks the awkward question: how do you move an asset from one chain to another at all? Bridges.
Check yourself
Five questions.
Answers come straight from this lesson. Submitting completes it.