What Is AMM (Automated Market Maker)?
Also known as: Automated Market Maker, AMM Protocol, Constant Product AMM
In short
An AMM (automated market maker) is a smart contract model at the heart of decentralized exchanges that sets prices automatically using liquidity pools and a mathematical formula instead of an order book matching buyers and sellers.
In an AMM, liquidity providers deposit two or more tokens into a pool. Users who trade do not deal with another person but directly with this pool. The best-known formula is the constant product formula popularized by Uniswap (x × y = k): the price adjusts so that the product of the quantities of the two tokens in the pool stays constant. As a token is withdrawn from the pool, its quantity decreases and its price rises.
For example, a user buying ETH in an ETH/USDC pool adds USDC to the pool and withdraws ETH from it; this raises the price of ETH in the pool. If the pool price deviates from other markets, arbitrageurs step in to bring prices back into line. Liquidity providers earn a share of the fee charged on every trade. Curve uses a different formula for similarly priced assets, and Balancer for multi-asset pools.
AMMs allow anyone to provide liquidity without permission and to trade without interruption. However, liquidity providers face the risk of impermanent loss caused by price changes; in low-liquidity pools, large trades lead to high slippage, and trades can be exposed to front-running by MEV bots.
Last updated: · This content is for information purposes only and is not investment advice.