In my previous article<\/a>, I shared a high-level breakdown of how I built my own arbitrage bot on Solana\u200a\u2014\u200aleveraging liquidity from decentralized exchanges (DEXs) and executing atomic multihop\u00a0swaps.<\/p>\n After publishing it, I got a bunch of comments and DMs with the same core question:<\/p>\n Where does the price on a DEX actually come\u00a0from?<\/strong><\/p>\n Why does it move? Who sets it? And what\u2019s up with slippage?<\/p>\n So in this article, I want to go deeper and explain how pricing works inside decentralized liquidity pools. No fluff\u200a\u2014\u200ajust clear examples and simple explanations.<\/p>\n If you\u2019re curious to dig into the math and mechanics under the hood, let me know in the comments\u200a\u2014\u200ahappy to explore that in follow-ups.<\/p>\n Let\u2019s start by quickly revisiting how price formation works on centralized exchanges (CEXs), and then contrast it with\u00a0DEXs.<\/p>\n If you want to see more of my posts, insights, and real experiences from trading, building bots, and experimenting with Solana DeFi\u200a\u2014\u200ajoin my Telegram channel<\/a>. I share shorter, more frequent updates there than on the\u00a0blog.<\/p>\n On CEXs like Binance, Bybit, or OKX, the price is determined through orders<\/strong>. One person wants to buy, another wants to sell\u200a\u2014\u200aand the exchange simply matches their\u00a0orders.<\/p>\n Example:<\/strong><\/p>\n Someone wants to buy 1 BTC for\u00a0$85,000<\/strong>Someone is willing to sell for\u00a0$85,100<\/strong>The exchange just shows what each side is offering\u200a\u2014\u200aand trades happen based on those\u00a0prices<\/p>\n Imagine a vertical Y-axis<\/strong>, where the top represents high prices and the bottom\u200a\u2014\u200alow prices. That\u2019s how we visualize the order\u00a0book.<\/p>\n Sellers<\/strong> always want to sell at higher prices, so in the sell side<\/strong> of the\u00a0book:<\/p>\n the lowest<\/strong> (most attractive for buyers) price is at the\u00a0bottomthe highest<\/strong> offers are at the\u00a0top<\/p>\n Buyers<\/strong>, on the other hand, want to buy cheaper, so in the buy\u00a0side<\/strong>:<\/p>\n the highest<\/strong> price (more attractive for sellers) is at the\u00a0toplower bids are listed\u00a0below<\/p>\n Below is an example of how it looks in practice.<\/p>\n For example:<\/p>\n I want to buy 4 BTC (look at the Amount BTC<\/em>\u00a0column),At a price of $85,700 per BTC (Price USDT<\/em>\u00a0cell),For a total of $342,800 (Total USDT<\/em>\u200a\u2014\u200a4 \u00d7\u00a085,700).<\/p>\n Each row in both sides of the order book represents orders like this\u200a\u2014\u200ajust like the one we broke\u00a0down.<\/p>\n To make it clearer, let\u2019s imagine flipping the BUY order book upside down (like a mirror reflection)<\/p>\n and placing it under the bottom of the SELL order\u00a0book.<\/p>\n This gives us the classic picture with a spread in the middle\u200a\u2014\u200ashowing how the buy and sell prices converge.<\/p>\n All of this makes up the order book<\/strong>\u200a\u2014\u200aa table where the sell orders are on top, and the buy orders are at the bottom. They don\u2019t align perfectly, and the gap between them is called the\u00a0spread<\/strong>.<\/p>\n You go to Binance and want to buy 1\u00a0SOL.<\/p>\n The order book shows that the nearest seller is offering it at\u00a0$145<\/strong>.You click \u201cbuy at market\u201d\u200a\u2014\u200athe exchange takes that order from the seller, and you get SOL at\u00a0$145.That transaction\u200a\u2014\u200a$145\u200a\u2014\u200abecomes the current market\u00a0price<\/strong>.<\/p>\n Prices on a CEX change constantly\u200a\u2014\u200anot because someone is \u201csetting\u201d the price, but because people place orders: someone buys, someone sells, and that creates the new\u00a0price.<\/p>\n It\u2019s like an auction\u200a\u2014\u200athe price is whatever people are willing to\u00a0pay.<\/p>\n The exchange doesn\u2019t set the price itself\u200a\u2014\u200ait simply matches orders between participants.<\/p>\n Unlike centralized exchanges where prices are set by matching buy and sell orders, decentralized exchanges (DEXs) work differently\u200a\u2014\u200athrough liquidity pools.<\/p>\n A liquidity pool is a smart contract holding two tokens, like SOL and\u00a0USDC.<\/p>\n Anyone can come and swap one for the other\u200a\u2014\u200aat a rate determined by the current ratio of tokens inside the\u00a0pool.<\/p>\n If we simplify things to the most fundamental level, almost every DEX uses one of two core pricing models under the\u00a0hood:<\/p>\n Example: <\/strong>OpenBook (formerly Serum)<\/p>\n Prices are formed through limit\u00a0ordersThere are buyers and sellers, each setting their own\u00a0priceA smart contract matches orders just like on a centralized exchangeFeels almost like a CEX\u200a\u2014\u200abut everything runs\u00a0on-chain<\/p>\n And this is where things get more interesting.<\/p>\n Instead of using orders, the price is based purely on the token balances in the pool\u200a\u2014\u200aand a formula that calculates the exchange\u00a0rate.<\/p>\n This includes several variations:<\/p>\n CPMM (Constant Product Market\u00a0Maker)<\/strong><\/p>\n Used in: Raydium AMM v4, Raydium CPMM, Uniswap\u00a0V2Formula: X * Y = K\u200a\u2014\u200asimple and\u00a0reliable<\/p>\n CLMM (Concentrated Liquidity Market\u00a0Maker)<\/strong><\/p>\n Used in: Uniswap V3, Raydium\u00a0CLMMLiquidity is allocated within specific price ranges (ticks), reducing\u00a0slippage<\/p>\n DLMM (Dynamic Liquidity Market\u00a0Maker)<\/strong><\/p>\n Used in:\u00a0MeteoraLiquidity automatically follows the price, offering more flexibility than\u00a0CLMM<\/p>\n Instead of matching buyers and sellers like in an order book, AMMs rely on token balances in a liquidity pool and a formula to determine price. There are no limit orders\u200a\u2014\u200ajust math and assets locked in a smart contract.<\/p>\n At the core of this model lies a simple yet powerful\u00a0formula:<\/p>\n X * Y =\u00a0K<\/em><\/strong><\/p>\n Where:<\/p>\n X<\/strong> is the amount of one token in the pool (e.g.,\u00a0SOL)Y<\/strong> is the amount of the other token (e.g.,\u00a0USDC)K<\/strong> is a constant\u200a\u2014\u200athe product of the initial amounts of SOL and USDC\u200a\u2014\u200aand it stays the same during each\u00a0swap<\/p>\n This formula ensures that as one token is bought, its price increases relative to the other, maintaining balance in the\u00a0pool.<\/p>\n Let\u2019s say you want to swap SOL \u2192\u00a0USDC<\/strong>.<\/p>\n You add some SOL into the pool\u200a\u2014\u200awhich means X increases<\/strong>.To keep K<\/strong> constant, Y<\/strong> (the amount of USDC) has to decrease.You receive those USDC\u200a\u2014\u200abut at a worse rate<\/strong>, because you disrupted the pool\u2019s\u00a0balance.The more you swap, the more you shift the balance\u200a\u2014\u200aand the worse the exchange rate\u00a0gets<\/strong>.<\/p>\n That\u2019s why larger swaps suffer from higher slippage\u200a\u2014\u200ait\u2019s not a fee, it\u2019s just how AMMs naturally work.<\/p>\n Let\u2019s say the pool contains:<\/strong><\/p>\n 1000 SOL100,000 USDC<\/p>\n That means:<\/p>\n K = 1000 \u00d7 100,000 = 100,000,000<\/strong><\/p>\n You want to swap 1 SOL<\/strong> for\u00a0USDC.<\/p>\n After the swap, the new SOL balance becomes X =\u00a01001<\/strong>.<\/p>\n To keep K<\/strong> constant, we calculate the new USDC\u00a0balance:<\/p>\n Y = K \/ X = 100,000,000 \/ 1001 \u2248\u00a099,900.1<\/em><\/strong><\/p>\n So:<\/p>\n USDC before:\u00a0100,000USDC after:\u00a099,900.1You receive: \u2248 99.9\u00a0USDC<\/strong><\/p>\n Effective rate: 1 SOL = 99.9\u00a0USDC<\/strong><\/p>\n (instead of exactly 100\u200a\u2014\u200ayou get a tiny bit less due to slippage)<\/p>\n Let\u2019s take the same\u00a0pool:<\/p>\n 1000 SOL100,000 USDCSo, K = 1000 \u00d7 100,000 = 100,000,000<\/strong><\/p>\n Now you want to swap 100 SOL<\/strong> for\u00a0USDC.<\/p>\n The new SOL balance becomes X =\u00a01100<\/strong><\/p>\n Calculate the new USDC\u00a0balance:<\/p>\n Y = K \/ X = 100,000,000 \/ 1100 \u2248\u00a090,909.1<\/em><\/strong><\/p>\n So in the\u00a0pool:<\/p>\n USDC before:\u00a0100,000USDC after:\u00a090,909.1Pool now have: 100,000\u201390,909.1 = 9,090.9\u00a0USDC<\/strong><\/p>\n Effective rate:<\/p>\n 100 SOL = 9,090.9 USDC \u2192 1 SOL \u2248 90.91\u00a0USDC<\/strong><\/p>\n That\u2019s a much worse rate<\/strong> than before\u200a\u2014\u200ayou\u2019ve shifted the balance heavily, so the price dropped hard. That\u2019s slippage in\u00a0action.<\/p>\n To demonstrate how everything works in practice, I created a test pool on devnet and will walk through how the calculation is done\u200a\u2014\u200aand how closely it matches\u00a0reality.<\/p>\n I minted two test tokens for myself, which I\u2019ll use as paired assets in the\u00a0pool.<\/p>\n For this experiment, I set up a pool with 100 tokens of each type\u200a\u2014\u200aToken X and Token\u00a0Y.<\/p>\n In the screenshot you can\u00a0see:<\/p>\n Base Token (2no)<\/strong>\u200a\u2014\u200awe\u2019ll call this Token\u00a0XQuote Token (BaS)<\/strong>\u200a\u2014\u200athis will be Token\u00a0YInitial Price<\/strong>\u200a\u2014\u200aI set it to 1, meaning 1 Token X = 1 Token Y. This almost never happens in real markets, but it\u2019s perfect for a clean\u00a0example.Base Fee<\/strong>\u200a\u2014\u200athe default swap fee on devnet is\u00a010%<\/p>\n Now let\u2019s see what happens when we try to\u00a0swap.<\/p>\n Recalling the classic AMM\u00a0formula:<\/p>\n X \u00d7 Y = K<\/strong>\u200a\u2014\u200amust remain constant.<\/p>\n Without fees<\/strong>, here\u2019s the basic\u00a0math:<\/p>\n Initial state of the\u00a0pool:<\/strong><\/p>\n X = 100, Y =\u00a0100So: K = 100 \u00d7 100 =\u00a010,000<\/p>\n You add 10 tokens of\u00a0X:<\/strong><\/p>\n Xnew = 100 + 10 =\u00a0110<\/p>\n Now calculate new\u00a0Y:<\/strong><\/p>\n Ynew = K \/ Xnew = 10,000 \/ 110 \u2248\u00a090.91<\/p>\n Amount you\u00a0receive:<\/strong><\/p>\n AmountOut = Y\u200a\u2014\u200aYnew = 100\u201390.91 \u2248\u00a09.09<\/p>\n \ud83d\udd38 So, without any fee<\/strong>, you\u2019d get ~9.09 Y tokens<\/strong> in return for 10\u00a0X.<\/p>\n Next up: we\u2019ll factor in the swap\u00a0fee.<\/p>\n Most AMMs apply the fee on the input token<\/strong>, so here\u2019s how it\u00a0works:<\/p>\n You swap 10 X, but 10% goes to\u00a0fees:<\/strong><\/p>\n 10 * 0.10 = 1 X taken as a\u00a0feeOnly 10 * 0.90 = 9 X reaches the\u00a0pool<\/p>\n New pool\u00a0state:<\/strong><\/p>\n Xnew = 100 + 9 =\u00a0109Ynew = 10,000 \/ 109 \u2248\u00a091.74<\/p>\n Final output:<\/strong><\/p>\n AmountOut = 100\u201391.74 \u2248 8.26\u00a0Y<\/p>\n \ud83d\udd3a So you receive 8.26 Y instead of 9.09\u00a0Y.<\/strong><\/p>\n That difference\u200a\u2014\u200a0.83 Y<\/strong>\u200a\u2014\u200ais the effective cost of the 10% swap\u00a0fee<\/strong>.<\/p>\n Important:<\/strong><\/p>\n This is not<\/em> universal behavior\u200a\u2014\u200adifferent DEXs and liquidity pools handle this differently:<\/p>\n In ExactIn<\/strong>, the fee is subtracted from the input<\/strong> (like in our\u00a0example)In ExactOut<\/strong>, the fee is taken from the\u00a0output<\/strong>Some models even add the fee on top<\/strong> of the input\u00a0amount<\/p>\n That\u2019s why you should always\u00a0check:<\/p>\n Which swap model<\/strong> is used (ExactIn, ExactOut, hybrid)How fees<\/strong> are applied on that specific\u00a0DEX<\/p>\n What happened to the pool after the\u00a0swap?<\/strong><\/p>\n From the screenshot:<\/p>\n Token X balance:\u00a0109.00<\/strong>Token Y balance:\u00a091.74<\/strong>The new price dropped: from 1<\/strong> to \u2248\u00a00.841<\/strong><\/p>\n \ud83d\udca1 This price shift reflects how AMMs work\u200a\u2014\u200aswaps change the ratio, and therefore the\u00a0price.<\/p>\n \ud83d\udccc Makes\u00a0sense:<\/strong><\/p>\n You added more of token\u00a0X<\/strong>,The pool now holds more X<\/strong> and less\u00a0Y<\/strong>,\u2192 So X lost value<\/strong>, and Y became more expensive<\/strong>.<\/p>\n That\u2019s how AMM pricing dynamically adjusts after each swap\u200a\u2014\u200athe pool always seeks to restore balance through the\u00a0price.<\/p>\n After the first swap, the token balances in the pool have changed. Now let\u2019s run the same swap again\u200a\u2014\u200aanother 10 tokens of X\u200a\u2014\u200aand see what\u00a0happens.<\/p>\n Starting state after the first\u00a0swap:<\/strong><\/p>\n X =\u00a0109Y =\u00a091.74K = 10,000 (the formula stays the\u00a0same)<\/p>\n Let\u2019s factor in the 10% fee right\u00a0away:<\/strong><\/p>\n Just like\u00a0before:<\/p>\n You send 10\u00a0X<\/strong>10% fee = 1 X<\/strong>, so only 9 X<\/strong> reaches the\u00a0pool<\/p>\n New X\u00a0balance:<\/strong><\/p>\n Xnew = 109 + 9 =\u00a0118<\/strong><\/p>\n Recalculate Y:<\/strong><\/p>\n Ynew = 10,000 \/ 118 \u2248\u00a084.74<\/strong><\/p>\n Output:<\/strong><\/p>\n AmountOut = 91.74\u201384.74 = 7\u00a0Y<\/strong><\/p>\n \ud83d\udd3b You only get 7 Y tokens<\/strong> this time\u200a\u2014\u200aless than the previous\u00a0swap.<\/p>\n First swap<\/strong>: 10 X \u2192 8.26\u00a0YSecond swap<\/strong>: 10 X \u2192 7 Y, you got less for the same amount of\u00a0input.<\/p>\n In total<\/strong>:<\/p>\n 20 X \u2192 15.26\u00a0Y<\/strong><\/p>\n Because the ratio of tokens in the pool changed\u200a\u2014\u200aand the price of token X relative to Y\u00a0dropped.<\/p>\n In other words, your X is now \u201cworth less\u201d than\u00a0before.<\/p>\n The larger the pool\u2019s liquidity<\/strong>, the less your swap affects the\u00a0price.The larger your swap<\/strong>, the more the price shifts\u200a\u2014\u200aand the higher the slippage.<\/p>\n You can now\u00a0see:<\/p>\n Updated token balances in the\u00a0poolNew X-to-Y\u00a0ratioThe updated price shown in the\u00a0UI<\/p>\n The current price<\/strong> shown in the UI is just the token ratio in the pool<\/strong>\u200a\u2014\u200anot the actual rate you\u2019ll get on your next\u00a0swap.<\/p>\n The real swap price<\/strong> is calculated at the moment of the transaction, based\u00a0on:<\/p>\n current liquidity,the size of your\u00a0swap,and the fee\u00a0model.<\/p>\n The formula X * Y = K is simple\u200a\u2014\u200abut it\u2019s not<\/strong> about fixed exchange\u00a0rates.<\/p>\n Every swap changes the\u00a0price.<\/strong><\/p>\n That\u2019s exactly why arbitrage<\/strong> exists between\u00a0pools:<\/p>\n If one pool\u2019s price shifts significantly and another hasn\u2019t caught up\u200a\u2014\u200athat\u2019s an opportunity.<\/p>\n The larger your swap<\/strong>, the worse the\u00a0rate.It\u2019s better to do one swap of size X<\/strong> than two swaps of 0.5X<\/strong>\u00a0each.If the current pool price<\/strong> is 1.5, that doesn\u2019t mean you\u2019ll get exactly 15 SPL for 10 USDT\u200a\u2014\u200abecause the effective rate<\/strong> is calculated every time via the X * Y = K\u00a0formula.The greater the pool liquidity (K)<\/strong>, the larger your swap<\/strong> can be without significant price\u00a0impact.<\/p>\n Follow if you\u2019re curious\u00a0\ud83d\uddff<\/p>\n Instagram<\/a>Linkedin<\/a>Telegram Channel<\/a>My Solana Bots Ecosystem<\/a><\/p>\n DEX from the Inside: Who Moves the Price and How It Actually Works<\/a> was originally published in Coinmonks<\/a> on Medium, where people are continuing the conversation by highlighting and responding to this story.<\/p>","protected":false},"excerpt":{"rendered":" Who Really Moves Prices on a DEX\u200a\u2014\u200aAnd Why You Get Less Than\u00a0Expected Preamble In my previous article, I shared a high-level breakdown of how I built my own arbitrage bot on Solana\u200a\u2014\u200aleveraging liquidity from decentralized exchanges (DEXs) and executing atomic multihop\u00a0swaps. After publishing it, I got a bunch of comments and DMs with the same […]<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-91119","post","type-post","status-publish","format-standard","hentry","category-interesting"],"_links":{"self":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/91119"}],"collection":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=91119"}],"version-history":[{"count":0,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=\/wp\/v2\/posts\/91119\/revisions"}],"wp:attachment":[{"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=91119"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=91119"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mycryptomania.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=91119"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}How pricing works on\u00a0CEXs<\/h3>\n
How it looks\u00a0visually<\/h3>\n
How to read\u00a0this?<\/h3>\n
Order Book Visualization<\/h3>\n
Example:<\/h3>\n
How Pricing Works on a DEX: Order Book vs AMM\u00a0\ud83d\udca5<\/h3>\n
What pricing mechanics are out\u00a0there?<\/h3>\n
Order Book (Limit\u00a0Orders)<\/h3>\n
AMM (Automated Market\u00a0Maker)<\/h3>\n
AMM (Automated Market Maker)\u00a0\ud83d\udca5<\/h3>\n
How a Swap\u00a0Works<\/h3>\n
Example 1\u200a\u2014\u200aSmall\u00a0Swap<\/h3>\n
Example 2\u200a\u2014\u200aLarge Swap (and Noticeable Slippage)<\/h3>\n
Practical Example on Meteora Devnet\u00a0\ud83d\udca5<\/h3>\n
Creating the\u00a0pool<\/h3>\n
Making the first swap: exchanging 10 X for Y\u00a0\ud83d\udca5<\/h3>\n
Now let\u2019s include the 10%\u00a0fee:<\/h3>\n
Let\u2019s do the second swap\u200a\u2014\u200aexchanging another 10 X for Y\u00a0\ud83d\udca5<\/h3>\n
Comparing to the First\u00a0Swap<\/h3>\n
Why is\u00a0that?<\/h3>\n
Key Takeaways:<\/h3>\n
Visual Representation:<\/h3>\n
But Here\u2019s What\u2019s Important to Understand:<\/h3>\n
Key Takeaways \ud83d\udca5<\/h3>\n
My socials.<\/h3>\n