Defi Smart Contracts

DeFi: Automated Market Makers (AMM)

Core Mechanics

Traditional finance uses Order Books (matching buyers and sellers). DeFi protocols like Uniswap use AMMs: algorithms that pool liquidity and price assets deterministically using math.

1. The Constant Product Formula

The core engine of an AMM is x * y = k.

• x and y are the quantities of two tokens in a liquidity pool.
• k must remain constant after a trade.
• If a user buys token X, they must add token Y, making X scarcer and thus more expensive. This curve automatically provides continuous liquidity.

2. Smart Contract Reentrancy Guard

A classic vector for stealing funds. If a contract calls an external untrusted contract before updating its own internal balances, the malicious contract can recursively call back (re-enter) the original function to drain funds. Always use a ReentrancyGuard mutex or follow the Checks-Effects-Interactions pattern.

AMM Swap Flow Map

%%{init: {"theme": "default", "flowchart": {"useMaxWidth": true}}}%%
flowchart TD
    subgraph User ["Trader"]
        A["Swap 10 Token A for Token B"]
    end
    
    subgraph AMM_Contract ["Liquidity Pool Contract"]
        B["Check reserves (x, y)"]
        C["Calculate Output: (y - k/(x+10))"]
        D["Execute Transfer"]
    end
    
    subgraph Reentrancy_Guard ["Security Layer"]
        E{"Is Locked?"}
        F["Lock Mutex"]
        G["Unlock Mutex"]
    end
    
    A --> E
    E -->|"No"| F
    F --> B
    B --> C
    C --> D
    D --> G