AMM Guide: How Automated Market Makers Work for Token Launches
An Automated Market Maker (AMM) is the engine behind decentralized token trading. It replaces traditional order books with liquidity pools, allowing tokens to be traded 24/7. For creators launching on Solana, understanding AMMs is key to managing post-launch liquidity and price discovery.
Key Points
- 1AMMs use liquidity pools instead of order books, allowing anyone to trade tokens directly.
- 2The Constant Product Formula (x*y=k) is the core math determining token prices based on pool ratios.
- 3Liquidity Providers (LPs) deposit token pairs to earn a share of the trading fees (often 0.30%).
- 4Impermanent Loss is a risk for LPs when the price of their deposited assets diverges.
- 5AMMs enable instant, permissionless trading for new tokens right after launch.
What is an Automated Market Maker (AMM)?
The foundational system that makes decentralized trading possible.
An Automated Market Maker (AMM) is a decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. Instead of matching buyers and sellers in an order book, traders swap assets against a liquidity pool. These pools are funded by users called Liquidity Providers (LPs).
For a creator launching a token, an AMM means your token can be traded immediately after launch without needing a centralized exchange listing. Platforms like pump.fun and Spawned use integrated AMMs so trading begins the moment your token goes live.
The Core Math: The Constant Product Formula
Understand the simple equation that sets every token price.
Most AMMs, including those on Solana, use the Constant Product Formula: x * y = k.
- x = Amount of Token A in the pool (e.g., SOL).
- y = Amount of Token B in the pool (e.g., your new token, $SPAWN).
- k = A constant value that must always remain the same.
How it determines price: If a trader buys your $SPAWN token with SOL, they remove $SPAWN (y) from the pool and add SOL (x). To keep k constant, the price of $SPAWN increases as the pool balance shifts. This creates a predictable, automated price curve: the more of a token you buy in one trade, the more expensive each subsequent unit becomes.
AMM vs. Traditional Order Book: Key Differences
Why AMMs are the default for new token launches.
| Feature | Automated Market Maker (AMM) | Traditional Order Book Exchange |
|---|---|---|
| Mechanism | Algorithmic pricing via liquidity pools. | Buy & sell orders matched by price. |
| Liquidity | Provided by users (LPs) depositing pairs. | Provided by professional market makers. |
| Availability | 24/7, permissionless. | Dependent on exchange hours & listing. |
| Setup for New Tokens | Instant. Anyone can create a pool. | Requires formal listing process & fees. |
| Price Discovery | Based on pool ratios and trading activity. | Based on the highest bid and lowest ask. |
For creators: An AMM offers immediate, censorship-resistant trading. Your community can provide liquidity and start trading within minutes of your token launch on Spawned.
The Role of a Liquidity Provider (LP)
Liquidity Providers are essential to the AMM model. They deposit an equal value of two tokens into a pool (e.g., SOL and your new token). In return, they receive LP tokens representing their share of the pool.
What LPs get:
- Trading Fees: A percentage of every trade in their pool. On Spawned, this is 0.30% per trade, shared among all LPs.
- Potential Rewards: Some protocols offer additional token incentives.
What LPs risk:
- Impermanent Loss (IL): The value of the assets in the pool can change compared to simply holding them. If your token's price spikes after launch, LPs might earn less than if they had just held the tokens. IL is 'impermanent' if prices return to the deposit ratio.
- Deposit equal value of two tokens (e.g., 5 SOL + $500 worth of your token).
- Receive LP tokens representing your pool share.
- Earn 0.30% of all trading fees generated by the pool.
- Face Impermanent Loss risk if token prices diverge significantly.
How Launchpads Like Spawned Integrate AMMs
From creation to trading in one seamless flow.
Modern Solana launchpads build the AMM directly into the launch process.
- Token Creation: You create your token using the launchpad's tools.
- Initial Liquidity Pool: Part of the funds raised during your launch (or a portion of the token supply) is automatically paired with SOL to form the initial liquidity pool.
- Immediate Trading: The AMM goes live instantly. There is no delay—your token is tradable the moment the launch concludes.
- Fee Structure: Platforms configure the AMM's fees. Spawned sets a 0.30% fee per trade, which is split: 0.30% to the creator as revenue and 0.30% to liquidity providers as ongoing rewards. This creates a sustainable ecosystem.
Verdict: Why AMMs Matter for Token Creators
The clear choice for sustainable token launches.
For any creator launching a token, using a platform with an integrated AMM is non-negotiable. It removes the biggest barrier to entry: liquidity.
Our recommendation: Launch on a platform like Spawned where the AMM is built-in and the fee structure is transparent. The 0.30% creator fee provides continuous revenue from day one, and the 0.30% LP reward incentivizes your community to provide deeper liquidity, stabilizing your token's price. The included AI website builder saves an additional $29-99 per month on essential marketing tools.
Avoid platforms with 0% fees, as they offer no sustainable incentive for liquidity provision long-term, which can lead to a 'pump and dump' scenario.
Ready to Launch with a Built-In AMM?
Turn understanding into action.
Now that you understand how AMMs provide instant liquidity and trading for your token, it's time to put that knowledge into action.
Launch your token on Spawned and benefit from:
- Instant AMM Integration: Trading goes live immediately post-launch.
- Creator Revenue: Earn 0.30% from every single trade in your token's pool.
- Holder Incentives: A matching 0.30% fee rewards the liquidity providers in your community.
- All-in-One Tooling: Includes an AI website builder at no extra monthly cost.
The launch fee is just 0.1 SOL (~$20). Start building your token's economy today.
Related Terms
Frequently Asked Questions
Not necessarily. On launchpads like Spawned, initial liquidity is often created automatically from a portion of the launch funds or token supply. However, as a creator, you or your team can choose to add more liquidity to create a deeper, more stable pool. This can build confidence, but remember it comes with the risk of impermanent loss.
Both determine price algorithmically, but their goals differ. A bonding curve (often used in initial launches) defines a fixed price path as tokens are minted. An AMM facilitates peer-to-peer trading *after* tokens exist, with price set by the pool's ratio of two assets (e.g., SOL/Token). Many launchpads start with a bonding curve phase, then migrate tokens to a standard AMM pool.
The protocol or platform deploying the AMM sets the fee. A common total fee is 0.30% per trade. On Spawned, this 0.30% is split: 0.30% goes to the token creator as perpetual revenue, and 0.30% is distributed to the Liquidity Providers (LPs) in that pool as a reward. Other platforms may direct all fees to LPs or take a protocol cut.
Impermanent loss occurs when the price of tokens you deposited in an AMM pool changes compared to when you deposited them. If one token moons in price, the AMM formula automatically rebalances the pool, meaning you would have been better off just holding the tokens instead of providing liquidity. The loss is 'impermanent' because if prices return to your original deposit ratio, the loss disappears.
Yes, absolutely. Starting on a DEX/AMM is common and can even help secure a CEX listing. Strong trading volume and community support on decentralized platforms like Raydium or Orca (which use AMMs) are positive signals for CEX listing teams. The AMM phase builds the initial price history and liquidity depth exchanges look for.
A 0% fee model offers no sustainable revenue for creators, often encouraging short-term 'pump and dump' launches. Spawned's 0.30% creator fee aligns long-term success: as your token trades, you earn continuous revenue to fund development, marketing, and community rewards. This creates a healthier, more sustainable project economy compared to one-time launch models.
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