AMM (Automated Market Maker)
A decentralized exchange mechanism that uses mathematical formulas and liquidity pools to determine asset prices automatically, eliminating the need for traditional order books and market makers.
Advertisement — Enable cookies to see relevant ads
An Automated Market Maker (AMM) is a type of decentralized exchange protocol that uses a mathematical formula to price assets automatically, rather than relying on a traditional order book where buyers and sellers post bids and asks. The foundational innovation, pioneered by Uniswap in 2018, is the constant product formula: x × y = k, where x and y represent the quantities of two tokens in a liquidity pool, and k is a constant. Traders swap against the pool, and the price adjusts algorithmically based on the changing ratio of tokens. Liquidity providers (LPs) deposit equal values of both tokens into the pool and earn a share of trading fees proportional to their contribution. The key advantage of AMMs over order book exchanges: always-available liquidity (no need to match buyers with sellers), passive income for LPs, and permissionless listing (anyone can create a pool for any token pair). The key risk for LPs: impermanent loss — when the price ratio of pooled tokens changes, the LP position ends up worth less than if they had simply held the tokens. In 2026, AMMs have evolved with concentrated liquidity (Uniswap V3), dynamic fees, and cross-chain AMMs that aggregate liquidity across multiple blockchains. AMMs process the vast majority of on-chain trading volume globally.