Automated market makers (AMMs) have come a long way since Uniswap’s “x·y = k” formula first proved that liquidity could live entirely on-chain. But the early AMM designs that powered DeFi’s rise were never perfect substitutes for real-world market makers—especially when it came to efficiency, inventory management, and impermanent loss.
A new class of models, often referred to as Prop AMMs (short for Proportional Automated Market Makers), aims to bridge that gap. They provide a liquidity curve that behaves more like a traditional market maker while keeping the passive, permissionless experience DeFi users expect.
This piece breaks down what Prop AMMs are, how they work, and why they matter for crypto investors and protocol designers.
Why AMMs Needed a Rethink
The constant-product AMM (CPAMM) was a breakthrough, but it had two structural drawbacks:
Capital Inefficiency – Liquidity is spread across all possible prices, even those an asset will never realistically hit.
High Impermanent Loss – The curvature of the x·y = k formula forces LPs to lose value anytime price diverges.
Uniswap v3 improved capital efficiency through concentrated liquidity, but at the cost of complexity. LPs effectively became full-time market makers—responsible for choosing ranges, rebalancing, and managing inventory.
Prop AMMs emerged as a middle path: more realistic price behavior than CPAMMs, but without the operational burden of v3.
Definition: What Exactly Is a Prop AMM?
A Prop AMM is an automated market maker that distributes liquidity proportionally along a price curve, usually a linear or near-linear relationship, rather than a constant-product curve.
Where CPAMMs enforce ( x \cdot y = k ), Prop AMMs use formulas such as:
Linear curves
( y = m \cdot x + b )Price-proportional curves
liquidity ∝ price levelCustom user-defined curves
(e.g., Carbon DeFi’s programmable strategies)
These curves aim to mirror how traditional market makers hold and rebalance inventory as price moves.
How a Prop AMM Works (In Plain English)
Think of a Prop AMM as an algorithmic version of a professional market maker:
It defines a curve describing how much of each token should exist at each price.
As price moves, the pool’s inventory automatically adjusts in proportion to that curve.
Traders interact with the pool just as they would with any AMM—swapping tokens at the implied price along the curve.
The result is a trading environment where:
liquidity isn’t wasted in remote price regions,
inventory tracks price changes more naturally, and
LPs take on less curvature-driven impermanent loss.
Prop AMMs vs. Traditional AMMs
Feature | Constant Product (Uniswap v2) | Concentrated Liquidity (v3) | Prop AMM |
|---|---|---|---|
Liquidity curve | ( x·y = k ) | User-set price ranges | Linear or proportional curve |
LP effort | None | High | Low |
IL profile | High | Medium | Low–Medium |
Capital efficiency | Low | High | Medium–High |
Behavior | Non-linear | User-defined | Inventory-based, MM-like |
Prop AMMs aim to sit in the “goldilocks zone”:
simpler than v3,
more capital-efficient than v2,
and closer to how professional market makers design their books.
Why Prop AMMs Matter
1. Reduced Impermanent Loss
Impermanent loss happens when the pool’s reserves diverge from the asset’s actual price path. Prop AMMs reduce curvature, which reduces divergence.
2. More Realistic Market-Making Exposure
LPs maintain a proportional inventory relative to market movement—mirroring traditional bid/ask liquidity providers.
3. Lower Operational Burden
Unlike v3, LPs don’t need to:
choose ranges,
re-adjust positions,
or constantly rebalance exposure.
4. Better Liquidity Distribution
Prop AMMs are ideal for assets that:
don’t exhibit extreme volatility,
trade within predictable bands,
or require smoother execution (e.g., long-tail tokens).
Where Prop AMMs Are Being Used
Several next-generation DeFi systems have adopted variations of proportional or programmable curves:
Carbon DeFi – Users define custom buy/sell curves, enabling more expressive strategies.
Bancor v2 Dynamics – Adaptive weights that track price to reduce IL.
Swaap DAO – Model-based AMM curves designed to be mathematically optimal.
Perp DEXs like Hyperliquid – Not a spot AMM, but uses a proportional inventory model similar in spirit.
While the implementations differ, the unifying theme is the rejection of “one-size-fits-all” AMM curves.
Why This Matters for the Future of DeFi
AMMs aren’t just venues—they’re economic primitives. The formulas that govern them shape:
slippage,
arbitrage incentives,
protocol revenue,
LP profitability,
and ultimately, the viability of on-chain liquidity.
Prop AMMs represent the next stage of that evolution.
They acknowledge that:
markets have structure,
liquidity has preferences,
and capital efficiency matters,
even in permissionless environments.
If constant-product AMMs were DeFi’s first generation, Prop AMMs are a sign that on-chain liquidity design is entering its professional era—closer to real-world market microstructure and more accommodating to institutional-grade strategies.
The Bottom Line
A Prop AMM is an automated market maker where liquidity is distributed proportionally—often via linear or custom curves—resulting in:
stronger capital efficiency,
reduced impermanent loss,
and more market-maker-like inventory behavior.
For investors, Prop AMMs matter because they may become the backbone of next-generation DEX infrastructure.
For builders, they offer a flexible design space for more efficient and expressive liquidity models.
For LPs, they provide a meaningful improvement over the blunt-force economics of constant-product AMMs.
As DeFi matures, expect proportional curves—and other intelligent AMM designs—to play a central role in how crypto markets evolve.
Disclaimer: The information provided in this newsletter is for informational purposes only and should not be considered investment advice. Cryptocurrency investments are speculative and involve significant risk. Please conduct your own research and consult with a financial professional before making any investment decisions.