An Automated Market Maker (AMM) is a type of smart contract protocol used in decentralized finance (DeFi) that enables the automated trading of digital assets without relying on a traditional order book or centralized market maker. Instead of matching buy and sell orders directly between users, AMMs use liquidity pools funded by other users. The most common model, used by Uniswap and others, adjusts prices based on the ratio of available tokens in the pool. This allows anyone to swap assets instantly, provide liquidity, or earn fees for supporting the pool. AMMs are a foundational technology for decentralized exchanges (DEXs), helping enable permissionless, 24/7 markets.
Key takeaways:
- AMMs automate trading based on liquidity pools, not order books.
- Pricing is determined by formulas, not humans.
- Liquidity providers earn fees for enabling trades.
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