> For the complete documentation index, see [llms.txt](https://docs.fractit.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.fractit.com/liquidity-and-amm/how-the-amm-works.md).

# How the AMM Works

***

### The constant product model

The pool holds two assets at all times: DFMREIT tokens and a stablecoin (USDC or CC). Every trade must maintain the constant product invariant:

```
x · y = k

x = quantity of DFMREIT tokens in the pool
y = quantity of USDC/CC in the pool
k = a constant, maintained across all trades
```

The price of DFMREIT at any moment is the ratio of `y` to `x`. As demand shifts, the ratio shifts — prices move continuously and predictably with every trade.

***

### A buy, step by step

1. You send USDC/CC into the pool — `y` increases.
2. DFMREIT tokens leave the pool — `x` decreases.
3. The new ratio `y/x` is higher — price has moved up.
4. The constant `k` is preserved throughout.

The reverse happens when you sell: DFMREIT enters the pool, USDC/CC exits, price moves down.

***

### Price impact

Larger trades move the price more. This is a direct function of your trade size relative to total pool size. A trade representing 1% of the pool will have meaningfully more price impact than one representing 0.01%.

The platform always displays your estimated price impact before you confirm.

***

### No order books, no counterparties

The AMM requires no matching engine and no counterparty on the other side of your trade. The pool itself is always your counterparty. This means:

* The market is always open — no minimum number of participants required
* Execution is atomic and deterministic
* There are no partial fills or pending orders

***

### How the AMM stays anchored to NAV

The AMM price is kept close to the DFMREIT indicative NAV by natural arbitrage incentives:

**Discount (AMM < NAV):** Buy tokens cheaply on AMM → redeem at NAV at the next window → profit. This buying pressure pushes the AMM price back up.

**Premium (AMM > NAV):** Subscribe for tokens at NAV during market hours → sell at a premium on AMM → profit. This selling pressure pushes the AMM price back down.

This mechanism runs without coordination. No admin, no oracle, no rebalancer required.