Automated Market Maker (AMM)

An Automated Market Maker (AMM) is a decentralized mechanism for automatic trading of digital assets in decentralized exchanges (DEXs). Instead of using traditional order books, AMMs rely on mathematical algorithms and liquidity pools. Liquidity providers deposit equal values of assets into these pools, establishing initial price ratios.

When users want to trade assets, they interact with the AMM contract, which calculates the amount of the second asset to provide based on the price ratio and pool size. This eliminates the need for counterparties and ensures continuous liquidity. AMMs use pricing algorithms, often the constant product formula, to maintain the constant product of asset quantities in the pool.

AMMs are popular in DeFi due to their efficiency, accessibility, and direct wallet trading. They provide control and privacy over funds, reducing reliance on intermediaries.