AMM pools operate on the principle of liquidity provision by users. Users deposit their tokens into a smart contract when participating in an AMM pool, effectively adding them to the liquidity pool. These tokens become available for trading within the AMM ecosystem. The pool employs an algorithm that dynamically adjusts token prices based on the ratio of tokens available in the pool. When a trade occurs, the smart contract automatically executes the transaction by swapping tokens from the pool at the prevailing price determined by the algorithm. This process ensures that liquidity is readily available for traders at any given time.