Crypto glossary
AMM (automated market maker)
An AMM, or automated market maker, is a smart contract that prices and executes token swaps from a pool of reserves instead of an order book.
An automated market maker replaces buyers and sellers posting orders with a pool of two or more tokens and a pricing rule. The best-known rule is the constant product formula used by Uniswap, x times y equals k: when a trader adds one token to the pool and removes the other, the ratio between reserves shifts and so does the price.
Liquidity providers deposit the tokens and earn a share of the trading fees. Variants exist for different assets: Curve uses a curve tuned for coins that should trade near the same price, such as stablecoins, while concentrated liquidity designs let providers place their capital in a chosen price range for greater efficiency.
AMMs made it possible to trade any token pair permissionlessly and around the clock. Their weaknesses are slippage on large trades relative to pool size, impermanent loss for liquidity providers and exposure to arbitrage and sandwich bots, since prices only update when someone trades.
Example
A pool holds 100 ETH and 300,000 USDC, implying 3,000 USDC per ETH. Buying 10 ETH requires about 33,333 USDC before fees, so the average price paid rises to roughly 3,333 USDC.
Related terms
Latest articles on AMM
- Curve Finance Expands StableSwap AMM Technology To Stellar Mainnet Ecosystem
- Uniswap Founder Says AMMs Could Power the $34.6B Tokenized Market
- Raydium Introduces Permissioned AMMs to Bring Tokenized Securities Into Solana DeFi
- Raydium Confirms $1.34 Million Hack on Retired AMM Program, Treasury to Cover Losses
- Pi Network Revamps DEX and AMM to Boost Liquidity and Token Transparency
