# Glossary

Term Explanation
AMM short for Automated Market Maker
Automated Market Maker a smart contract that is passively making markets, ie that is willing to trade with other market participants provided they match its price; often a CFMM
Base Asset, Base Token another name for Risk Asset
Bonding Curve the term bonding curve is ambiguous; it can refer to a characteristic function, and indifference curve, or a price response function
CFMM short for Constant Function Market Maker
Characteristic function the characteristic function is a common way to encode an AMM’s indifference curve; eg f = x*y is the indifference function for the original AMM
Constant Function Market Maker an AMM that uses a bonding curve / indifference curve algorithm
Cost Curve the cost curve is the supply curve in commodities markets where the different producers are sorted by production cost; see supply curve for more details
Divergence Loss the loss an AMM portofolio experiences when the price of the assets diverge; often misleadingly referred to as impermanent loss
Fee moneys paid to the AMM by trading counterparties
Impermanent Loss another (but misleading) name for Divergence Loss
Indifference Curve see mathematical function that determines which trades the CFMM is willing to enter
Numeraire when looking at a trading pair, the numeraire is the asset that is used as a unit of account, and the risk asset is the asset that is considered to move; note that this designation is ultimately a choice
PRF short for Price Response Function
Price Response Function the price response function is the combined supply and demand curve of an automated market maker; it establishes a relationship between the price, and how much supply an AMM will add to or remove from the market
Quote Asset, Quote Token another name for Numeraire
Risk Asset see the entry for Numeraire
Supply Curve supply curve is a standard microeconomic instrument that indicates how much supply will enter a market at a given price; when combined with the demand curve, which indicates how much supply will be removed at a given price, it allows to indicate the equilibrium price
Equilibrium Price price that balances supply and demand; see Supply Curve and Demand Curve for more details
Market Clearing Price Equilibrium Price (see there), especially in case of financial markets
Order Book book of all orders on a given financial market; closely related to this market’s short term supply and demand curves
Concentrated liquidity Liquidity that is both Range Bound and Levered; in other words, Concentrated Liquidity is only available to make markets in a very narrow range, and all unneccesary liquidity has been removed
Range-Bound liquidity Liquidity that is only available to make markets within a certain range
Liquidity, Liquidity Pool Funds (tokens) in the AMM that allow to make markets
Liquidity Providers agents who contributed Liquidity to an AMM in return of an ownership stake of the Liquidity Pool, often evidenced by Pool Tokens
Pool Tokens tokens handed out to Liquidity Provider as evidence for their Liquidity Provision; they allow to claim the fees earned, as well as to redeem the portion of pool Liquidity they represent
Levered Liquidity Liquidity that appears to be bigger than the actual amount provided, eg by restricting it to a certain range
Virtual Balance Liquidity balances that are considered to be in the pool for the purpose of the calculation, but that are not actually present