Automated Market Maker (AMM)

What is Automated Market Maker (AMM)?

An Automated Market Maker (AMM) is a protocol that uses a mathematical formula to price assets in a liquidity pool. It allows for decentralized trading without the need for a traditional order book or a centralized intermediary.

How does Automated Market Maker (AMM) work?

1. Liquidity providers (LPs) deposit pairs of tokens into a smart contract.

2. Traders swap tokens directly with the pool instead of a counterparty.

3. Prices are determined by a formula, typically the constant product formula:

   x * y = k

4. As one token is bought, its supply in the pool decreases and its price increases.

5. Arbitrageurs ensure the pool price stays aligned with the global market.

Why does Automated Market Maker (AMM) matter?

AMMs enable 24/7 permissionless trading for any asset, even those with low volume. They are the foundation of decentralized finance (DeFi), providing the liquidity needed for swaps, lending, and yield farming.

Key features of Automated Market Maker (AMM)

• No central order book
• Permissionless liquidity provision
• Algorithmic price discovery
• Continuous 24/7 availability
• Subject to "slippage" and "impermanent loss"

Examples of Automated Market Maker (AMM)

• Uniswap, which pioneered the constant product model on Ethereum.
• Curve Finance, optimized for low-slippage stablecoin swaps.
• Balancer, which allows pools with multiple assets and custom weights.