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As AMM, Diffusion replaces the buy- and sell orders in a classic order book market with liquidity pools (LP) of different assets valued relative to each other. When an asset is traded in a pool, the relative prices of the other assets shift, and a new market price for both is determined dynamically. Anyone can become a liquidity provider for a pool by depositing the underlying tokens. In return, the provider receives pool tokens as a receipt. These tokens track pro-rata shares of the total pool and can be redeemed for the underlying assets at any time.
Every trade on Diffusion captures a trading fee defined by the AMM pair which is increasing the pool size and is thus shared with the liquidity providers. Furthermore, additional rewards can be paid to attract assets into pools.
The best known AMM design is the so-called Constant Product Pool. As exchanges have matured, new algorithms have emerged, to align with market needs. Therefore, different pool types can be appropriate for particular token markets. Choosing the appropriate pool type for a given token market can increase efficiency for both traders and liquidity providers.
Currently, Diffusion allows for the following pool types:
In case you would like to learn more about the pool's infrastructure, feel free to check the next section. If you are looking for tutorials on how to swap or how to provide liquidity, check out the following tutorials in the academy area.