# How AMM Decentralized Exchanges Work?

![](/files/MA64eBwOr10TDAZMCqtg)

Uniswap is an AMM *protocol* that acts like a robot waiter serving up trades between you and a liquidity pool bootstrapped by liquidity providers (LPs). Under the AMM model, you can play several roles: trader, liquidity provider, and protocol governor. The protocol itself achieves two things:

1. Prices assets
2. Executes trades via smart contracts

For instance, let us imagine trading ETH tokens for UNI tokens on Uniswap. After clicking the *swap* button, the algorithm calculates how much the trade impacts the liquidity pool's reserves - after which a price quote is given.

After approving the transaction, the AMM deposits UNI tokens into the ETH-UNI pool. Finally, it sends the quoted amount of ETH from the pool to the customer’s wallet.

AMMs use a constant product formula to price assets, which states:

***x \* y = k***

X and *y* are equal amounts of a liquidity pool’s assets while *k* is the total or constant amount of pool liquidity. Now, let us view the ETH-UNI trade from the perspective of our new formula.

![](/files/nu4KMvjomndwrO6El2q7)

The way AMMs handle liquidity is similar to smart order routing systems. Both track the best paths for gathering liquidity at the best price possible.


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