What Is an AMM?
An Automated Market Maker (AMM) is a type of decentralized exchange that replaces traditional order books with liquidity pools governed by mathematical pricing formulas. Instead of matching buyers and sellers, AMMs let users trade against a pool of tokens funded by liquidity providers (LPs).
How AMMs Work
The most common AMM model uses the constant product formula: x × y = k, where x and y are the quantities of two tokens in the pool and k is a constant. When you buy token X, the pool's X decreases and Y increases, automatically raising X's price. The larger the trade relative to the pool, the greater the price impact (slippage).
Popular AMMs include Uniswap, Curve, Balancer, and Raydium.
Why It Matters for Traders
AMMs democratized token trading — any token can be traded instantly without centralized listing approvals. Understanding AMM mechanics helps traders optimize swap routing, minimize slippage, and identify mispriced tokens. AMM pool data (volume, TVL, fee generation) is also a fundamental analysis tool for DeFi token valuation.