What Is AMM (Automated Market Maker)?
An Automated Market Maker is a DeFi primitive: instead of matching buyers with sellers (like a traditional order book), users trade against a pool of two or more assets. Prices are determined algorithmically based on the ratio of assets in the pool.
Uniswap is the canonical example: pools hold pairs like ETH/USDC, and the constant-product formula (x*y=k) sets prices. Anyone can deposit assets to become a liquidity provider, earning a share of trading fees. The tradeoff is impermanent loss — when prices move, LPs end up holding more of the depreciating asset.
AMMs democratized market-making — no permission, no licensing, no order-matching infrastructure required. But they have known weaknesses: slippage on large trades, susceptibility to front-running, and the constant tension between fee earnings and impermanent loss. They're brilliant pieces of engineering and brutal places to provide capital.
Related terms
- DeFi (Decentralized Finance) — Financial applications built on blockchain without traditional intermediaries.
- Liquidity — The ease with which an asset can be bought or sold without significantly affecting its price.
- Slippage — The difference between the expected fill price of an order and the actual execution price.
- Stablecoin — A cryptocurrency designed to maintain a stable value, usually pegged to USD.