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I find the mechanisms behind crypto fascinating, so I wanted to do the thought exercise of creating my own coin, and seeing how it evolves in a simplistic spreadsheet-based example such as this one:
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The idea is that each month, in turn, each person (that would be me, here, every time) decides whether to buy, or sell, "Crypto" coins, and how any of them. Each person is different in the amount they already own (the creator of the coin) or the amount of money they have at their disposal.

I know that when creating a coin, the creator determines: a) how many coins it mints, b) how many coins the creator keeps, c) how many coins are injected as liquidity in the exchange, and d) for how much money when adding in the liquidity to set the initial price. The table is here populated with arbitrary data. I’m assuming here that this coin has a fixed supply and no more can be minted, to simplify things.

… Happy as a clam, I tried to run "month 2" – then I realised, that someone who believes in this coin would buy a lot of it because it’s cheap, effectively all that’s available as a liquidity seeing how cheap it is. What now? If nobody sells, does the exchange automatically increase the price until holders are incentivised to sell? Second, if for some obscure reason here I would not buy all the liquidity, would the price increase because someone bought it? By how much?

This made me realise that I have absolutely no clue about how exchanges calculate the price of a coin in their system. Is it always the same formula (and just the liquidity + members change) or does each exchange have their own algorithm? How could I simulate an exchange here?

This would help me tremendously if someone could actually try to "play" this example in their answer to illustrate. I’m sure this will be of interest to many as well, because I found this question around quite a lot in my research, but never has how been answered.


By pplny

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