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How AMM works

Bonding Curve

UniswapV2's AMM is "Constant Product Market Maker" that calculates price based on a formula x * y = k. where x and y are amount of each token reserved in a pool. When trader want to swap dx for dy, y_out is calculated according to below function. (Note that dx = - x_in, dy = y_in because trader adds dx and removes dy to the pool)
When a pool stakes pooled ETH and if x_0 represents actual reserve of ETH, the bonding curve collapses because k decreases pro rata amount of staked ETH. To prevent this, we allow x_0 to count amount of staked ETH so that the bonding curve doesn't change at all. This approach does not lose any amount of ETH under the assumption that LSD does not collapse.


Pooled ETH is staked by LSDAggregator for LPs to earn staking reward. See more LSDAggregator page.