Glossary — DeFi
What is AMM (Automated Market Maker)?
1 min read Updated
An Automated Market Maker (AMM) is a smart contract mechanism providing liquidity for token swaps using mathematical formulas and pooled funds — replacing order books with algorithmic pricing.
WHY IT MATTERS
AMMs made decentralized trading practical. Instead of active market makers, anyone can supply liquidity to a pool, and an algorithm sets prices based on pool ratios.
Uniswap's constant product formula (x × y = k) is elegant: buying token X raises its price because the pool has less of it. Newer designs optimize capital efficiency for specific use cases.
AMMs enable permissionless trading of any token pair. Anyone can create a pool, trade, or provide liquidity.
FREQUENTLY ASKED QUESTIONS
What is the constant product formula?
x × y = k: token quantities multiplied equal a constant. Buying one token reduces its pool quantity and raises its price. Creates smooth pricing with infinite (but increasingly expensive) liquidity.
What is concentrated liquidity?
Uniswap V3 innovation where LPs provide liquidity in specific price ranges rather than across the entire curve. More capital-efficient but requires active management.
Who provides liquidity?
Anyone. Liquidity providers deposit token pairs and earn trading fees proportional to their share of the pool. The risk is impermanent loss if token prices diverge.