## The Engine of Sovryn: A Technical Deep Dive into the Automated Market Maker
Community Call #11 was a foundational, educational session that took the community ‘under the hood’ of one of Sovryn’s most critical components: the **Automated Market Maker (AMM)**. The core developers broke down the technology that enables permissionless trading on the platform.
### Moving Beyond Order Books
The session began by contrasting a traditional order book exchange with an AMM. Instead of matching individual buy and sell orders, an AMM uses a pool of assets and a mathematical formula to algorithmically determine the price of an asset. This model allows for trading to occur 24/7 in a fully decentralized and autonomous manner.
### The Sovryn AMM Model
Sovryn’s AMM is based on the constant product formula, popularized by Uniswap, but with some key modifications. The smart contract, known as the ‘Converter,’ holds reserves of two or more tokens. The price is determined by the ratio of these reserves. When a user wants to swap one token for another, they add to the reserve of one token and withdraw from the reserve of the other, which shifts the ratio and thus the price for the next trade.
### The Vital Role of Liquidity Providers (LPs)
The AMM cannot function without liquidity. The team explained the crucial role of **Liquidity Providers (LPs)**. Any user can contribute to the ecosystem by depositing their assets into a liquidity pool. In return for providing this service, LPs earn two types of rewards:
1. **Trading Fees:** A small fee (typically 0.3%) is charged on every swap, and this fee is distributed proportionally to all the LPs in that pool.
2. **Liquidity Mining Incentives:** For certain strategic pools, the protocol will offer additional rewards in the form of SOV tokens to further incentivize liquidity.
### Understanding Impermanent Loss
The team also gave a transparent explanation of the primary risk for LPs: **impermanent loss**. They explained how price divergence between the assets in a pool can lead to a situation where the value of an LP’s withdrawn assets is less than if they had simply held them in their wallet. The goal for LPs is that the fees and rewards earned will be greater than any potential impermanent loss.
This deep dive provided the community with a solid understanding of the core mechanics of decentralized trading on Sovryn.