Automated Market Maker — a decentralized exchange mechanism that uses mathematical formulas and liquidity pools instead of order books.
An Automated Market Maker (AMM) is a type of decentralized exchange that uses mathematical formulas to price assets instead of matching buyers with sellers through an order book. The most common formula is x*y=k (constant product), used by Uniswap — where x and y are the quantities of two tokens in a pool, and k is a constant. Liquidity providers deposit equal values of both tokens into pools, and traders swap against these pools. The AMM algorithm automatically adjusts prices based on supply and demand within the pool. AMMs revolutionized crypto trading by enabling permissionless, 24/7 token swaps without centralized intermediaries. However, they introduce impermanent loss for liquidity providers and can have higher slippage than order book exchanges for large trades. Advanced AMM designs include concentrated liquidity (Uniswap v3), stable swaps (Curve), and virtual AMMs (Perpetual Protocol).
Automated Market Makers replaced the traditional order book model used by centralized exchanges with a mathematical formula that determines asset prices based on the ratio of tokens in a liquidity pool. The most common formula is the constant product model (x * y = k), pioneered by Uniswap, where increasing one token's supply automatically decreases its price relative to the other. This model enables permissionless trading — anyone can swap tokens instantly without needing a counterparty, and anyone can become a liquidity provider by depositing token pairs. More sophisticated AMM designs have emerged: Curve's StableSwap formula optimizes for stablecoin swaps with minimal slippage, Balancer supports multi-token pools with custom weightings, and concentrated liquidity (Uniswap v3) lets LPs focus capital within specific price ranges for greater efficiency.
Uniswap's AMM processes $1-2 billion in daily trading volume entirely through smart contracts — no company runs an order book. A trader swapping ETH for USDC interacts directly with a liquidity pool, and the AMM formula determines the exchange rate based on the pool's current token balances.
AMMs use mathematical formulas based on the ratio of tokens in their pools. When someone buys Token A, they add Token B to the pool and remove Token A — this changes the ratio and moves the price. Arbitrageurs keep AMM prices aligned with broader market prices by exploiting any discrepancies for profit.