What Are Automated Market Makers? [ Explained With Animations ]

Ever wondered how decentralized exchanges (DEX) process trades and discover prices? Unlike traditional exchanges, a DEX uses an automated market maker (AMM) to enable a fluid trading system that borders on autonomy, liquidity and automation.
What Are Automated Market Makers?
Unlike centralized exchanges, decentralized trading protocols do away with order books, order matching systems and financial entities acting as market makers: some examples are Uniswap, Sushi, Curve and Balancer.
The goal is to eliminate the input of third parties so that users can execute trades directly from their personal wallets. Hence, a majority of the processes are executed and governed by smart contracts.
In other words, AMMs allow traders to interact with smart contracts programmed to enable liquidity and discover prices.
How Do AMMs Work?
First and foremost, have it at the back of your mind that AMMs use preset mathematical formulas to discover and maintain the prices of paired cryptocurrencies. Also, note that AMMs allow anyone to provide liquidity for paired assets. The protocol allows anyone to become a liquidity provider (LP).
Once you stake your fund, you will receive liquidity provider tokens that denote your share of the liquidity deposited in a pool. These tokens also make you eligible to receive transaction fees as passive income. You may deposit these tokens on other protocols that accept them for more yield farming opportunities. To withdraw your liquidity from the pool, you would have to turn in your LP tokens.
Impermanent Loss
Although AMMs offer significant returns to LPs, there are risks involved. The most common is impermanent loss. This phenomenon arises when the price ratio of assets in a liquidity pool changes. LPs who have deposited funds in affected pools automatically incur an impermanent loss. The larger the shift in the price ratio, the larger the loss.
However, this loss is called impermanent for a reason. As long as you do not withdraw deposited tokens at a time that the pool is experiencing a shift in price ratio, it is still possible to mitigate this loss. The loss disappears when the prices of the tokens revert to the original value at which they were deposited. Those who withdraw funds before the prices revert suffer permanent losses. Nonetheless, it is possible for the income received via transaction fees to cover such losses.
Over the last couple of years, AMMs have proven to be innovative systems for enabling decentralized exchanges.
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[@dorkinsful]

Andrew, you said impairment instead of impermanent

[@chinweokevictor844]

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