AMM (Automated Market Maker)
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
An AMM is a type of decentralized exchange that uses mathematical formulas and liquidity pools instead of traditional order books to price and execute trades. Uniswap popularized the AMM model with its x*y=k formula.
An Automated Market Maker (AMM) is the mechanism underlying most decentralized exchanges. Instead of matching buyers with sellers (like a traditional order book exchange), AMMs use liquidity pools and mathematical formulas to determine prices automatically.
The core concept: - Liquidity pools: pairs of tokens held in a smart contract (e.g., ETH/USDC) - Pricing formula: the AMM uses a formula to set prices based on the ratio of tokens in the pool - No counterparty needed: traders swap directly against the pool, not with other traders
The most famous formula — Uniswap's constant product (x*y=k): - If pool has 100 ETH and 200,000 USDC, k = 20,000,000 - If you buy 10 ETH, the pool has 90 ETH: 20,000,000 ÷ 90 = 222,222 USDC - You effectively paid 22,222 USDC for 10 ETH ($2,222/ETH) - Price impact: the larger your trade relative to pool size, the worse your price
AMM innovations: - Uniswap V3: concentrated liquidity (LPs set price ranges for higher capital efficiency) - Curve: stable-optimized formula for assets near 1:1 parity - Balancer: multi-asset pools with custom weightings - CLMM (Concentrated Liquidity Market Makers): used by Raydium, Orca on Solana
AMMs enabled DeFi to flourish by creating permissionless markets for any token pair.
Frequently Asked Questions
How does an AMM determine token price?
AMM prices are determined by the ratio of tokens in the liquidity pool, governed by the pool's mathematical formula. The price changes with every trade — buying a token reduces its supply in the pool (raising the price), selling increases supply (lowering the price). This is why large trades cause more price impact (slippage).
What are the benefits of AMMs vs. traditional order books?
AMMs enable permissionless markets for any token pair, including obscure new tokens. They guarantee liquidity at any time (as long as the pool isn't empty), require no market makers, and are fully transparent. The tradeoff is capital inefficiency and impermanent loss for liquidity providers.
Related Terms
DEX (Decentralized Exchange)
A DEX is a cryptocurrency exchange that operates on a blockchain without a central authority. Users trade directly from their wallets using smart contracts, maintaining custody of their funds. Examples include Uniswap, Jupiter, and Raydium.
Impermanent Loss
Impermanent loss is the reduction in value that liquidity providers experience when the price ratio of their deposited token pair changes. The greater the price divergence, the larger the loss compared to simply holding the tokens.
Liquidity
Liquidity is how easily an asset can be bought or sold without significantly moving its price. High-liquidity assets like Bitcoin have tight bid-ask spreads, while low-liquidity altcoins can experience large price swings from small trades.
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