Launched in November 2018, Uniswap’s AMM uses the now-familiar constant-product invariant. Uniswap allows users to create pools consisting of ETH and any ERC20-compatible tokens with the following relationship.
x * y = k
where x – balance of ETH
y – balance of ERC20-compatible token
Although the Uniswap approach is simple, effective and gas efficient,[1] it suffers from impermanent loss.[2] Several subsequent approaches have been adopted to mitigate or avoid the issue of impermanent loss.
[1]: See: https://hackmd.io/@HaydenAdams/HJ9jLsfTz#Gas-Benchmarks
[2] Impermanent loss can be defined as “the opportunity cost of providing liquidity in an asset through an AMM versus holding that asset”