Automated Market Maker (AMM)
An Automated Market Maker (AMM) is a smart contract that replaces the traditional order book with a mathematical formula to price assets. Instead of matching buyers and sellers, traders interact directly with a liquidity pool. The most common form is the constant product AMM (x * y = k), popularized by Uniswap, where the product of the two token reserves remains constant before and after a trade. AMMs democratize liquidity provision — anyone can deposit tokens and earn fees proportional to their share of the pool. However, liquidity providers face impermanent loss when the price ratio of the pooled assets diverges from the deposit price. Recent iterations like Uniswap V3 introduced concentrated liquidity, allowing LPs to provide liquidity within custom price ranges for higher capital efficiency. AMMs now dominate on-chain spot trading volume and have expanded into derivatives, stablecoins, and lending.
Related terms
- Concentrated Liquidity
- Impermanent Loss
- Constant Product Market Maker
- Liquidity Provider
- Loss-Versus-Rebalancing