Automated Market Makers (AMM) in Blockchain / Solidity - Mini Project: Build & Apply

Automated Market Makers (AMM) Simulation

📖 Scenario: You want to understand how a simple Automated Market Maker (AMM) works in a blockchain environment. An AMM allows users to trade tokens automatically using a liquidity pool without needing a traditional order book.In this project, you will simulate a basic AMM that holds two tokens and uses the constant product formula to determine prices and trades.

🎯 Goal: Build a simple Python program that models an AMM liquidity pool with two tokens, calculates the price based on reserves, and simulates a token swap.

📋 What You'll Learn

Create a dictionary to represent the liquidity pool with exact token reserves

Add a variable for the swap fee percentage

Write a function to calculate the output amount of tokens for a given input amount using the constant product formula

Print the amount of tokens received after a swap

💡 Why This Matters

🌍 Real World

Automated Market Makers are used in decentralized exchanges on blockchains to enable token trading without traditional order books.

💼 Career

Understanding AMMs is important for blockchain developers, DeFi engineers, and anyone working with decentralized finance applications.

1

Set up the liquidity pool reserves

Create a dictionary called liquidity_pool with these exact entries: 'TokenA': 1000 and 'TokenB': 1000 to represent the initial reserves of each token.

Blockchain / Solidity

# Create the liquidity_pool dictionary with TokenA and TokenB reserves
# Your code here

Need a hint?

Use curly braces to create a dictionary with keys 'TokenA' and 'TokenB' and values 1000 each.

2

Add the swap fee configuration

Create a variable called swap_fee and set it to 0.003 to represent a 0.3% fee on swaps.

Blockchain / Solidity

liquidity_pool = {'TokenA': 1000, 'TokenB': 1000}
# Set the swap_fee variable to 0.003
# Your code here

Need a hint?

Assign the decimal 0.003 to the variable swap_fee.

3

Write the swap calculation function

Define a function called calculate_swap_output that takes three parameters: input_amount, input_reserve, and output_reserve. Inside the function, calculate the amount of output tokens received after applying the swap fee and using the constant product formula: output_amount = (input_amount_with_fee * output_reserve) / (input_reserve + input_amount_with_fee), where input_amount_with_fee = input_amount * (1 - swap_fee). Return the output_amount.

Blockchain / Solidity

liquidity_pool = {'TokenA': 1000, 'TokenB': 1000}
swap_fee = 0.003

# Define calculate_swap_output function below
# Your code here

Need a hint?

Use the formula given and remember to apply the swap fee before calculating output.

4

Simulate a token swap and print the output

Use the calculate_swap_output function to calculate how many 'TokenB' tokens you get when swapping 100 'TokenA' tokens. Store the result in a variable called tokens_received. Then print the exact string "Tokens received: {tokens_received:.6f}" using an f-string to show 6 decimal places.

Blockchain / Solidity

liquidity_pool = {'TokenA': 1000, 'TokenB': 1000}
swap_fee = 0.003

def calculate_swap_output(input_amount, input_reserve, output_reserve):
    input_amount_with_fee = input_amount * (1 - swap_fee)
    output_amount = (input_amount_with_fee * output_reserve) / (input_reserve + input_amount_with_fee)
    return output_amount

# Calculate tokens_received for swapping 100 TokenA and print the result
# Your code here

Need a hint?

Call the function with input_amount=100, input_reserve=liquidity_pool['TokenA'], output_reserve=liquidity_pool['TokenB'], then print with 6 decimals.