An automated market maker (AMM) is a set of smart-contract rules that powers some decentralized exchanges (DEXs). Instead of matching buyers and sellers through an order book, the AMM’s algorithm quotes prices directly and lets people trade against a pool of tokens held in the contract. This removes the need for a traditional intermediary or counterparty during a swap.
AMMs sit inside the broader DEX category and effectively replace the role played by human or institutional market makers on centralized venues. In plain terms: the code sets the price, and the pool supplies the assets.
On an AMM, you interact “peer-to-contract.” You send tokens to the smart contract and receive others back at the rate calculated by the pricing algorithm. There’s no separate trader on the other side of the deal, and the contract executes the swap automatically.
Behind the scenes, the AMM tracks the balance of each token in a liquidity pool and updates prices based on those balances. If demand shifts toward one token, the pool’s composition changes and the quoted price moves with it. This approach is what lets the system keep trades flowing without an order book.
The tokens in these pools come from users known as liquidity providers (LPs). Anyone can deposit supported assets into a pool; in return, LPs earn a share of the trading fees that the AMM charges on each swap. As more liquidity is added, the pool can usually handle larger trades with less slippage.
Order-book exchanges discover prices by matching bids and asks that traders set themselves. AMMs automate both pricing and matching inside the contract, quoting a price based on pool balances instead of open orders. That’s the key difference in how trades are routed and how prices are determined.
Some AMMs reference external price feeds (oracles) to keep on-chain quotes aligned with wider markets. If the on-chain price drifts away from centralized exchange prices, arbitrage traders can step in to close the gap, and the pool’s balances—and therefore its price—adjust as they trade.
Popular AMM-based DEXs include Uniswap, Balancer, PancakeSwap, and Curve. Each applies the same basic idea—algorithmic pricing and user-supplied liquidity—through its own smart-contract design.
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