AMM (Automated Market Maker)

A protocol that uses liquidity pools and algorithms to facilitate decentralized trading of digital assets.

What is an AMM?

An Automated Market Maker (AMM) is a decentralized protocol that enables the trading of digital assets without traditional order books, relying instead on liquidity pools and mathematical formulas to set prices. AMMs are integral to decentralized exchanges (DEXs) like Uniswap, SushiSwap, and PancakeSwap, operating on blockchains such as Ethereum, Solana, and Binance Smart Chain. Liquidity providers deposit pairs of assets (e.g., ETH/USDT) into pools, and trades are executed against these pools, with prices determined by formulas like the constant product model (x * y = k), ensuring continuous liquidity.

AMMs eliminate intermediaries by automating trades through smart contracts, allowing anyone to trade or provide liquidity permissionlessly. For example, Uniswap’s AMM adjusts prices based on the ratio of assets in a pool, incentivizing arbitrageurs to balance it. Liquidity providers earn fees (e.g., 0.3% per trade on Uniswap V2) but face risks like impermanent loss, where price divergence reduces returns. AMMs have transformed DeFi by enabling efficient, 24/7 trading with low barriers to entry, handling billions in trading volume—Uniswap alone processed over $1 trillion cumulatively by 2025.

Key features include accessibility, as anyone can participate, and flexibility, supporting various asset pairs. However, challenges like high gas fees on Ethereum or slippage during volatile markets persist. Tools like Dune Analytics or DeFi Pulse can track AMM performance and pool metrics for informed decision-making.