Automated Market Maker (AMM)

An automated market maker (AMM) is a type of (DEX) protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm. [1][10]


Because AMMs are built on and utilize , trades can be conducted at any time, in a permissionless way, and for much lower fees than on a traditional exchange. When someone wants to buy or sell an asset on a decentralized exchange, they simply submit the trade to the smart contract and it’ll be automatically executed at whatever the current market price is. [10]

There are two main types of automated market makers (AMMs). While one may be governed and set up by professional market makers, the other is fully automated by a set algorithm, allowing any user in the market to participate by depositing liquidity into the smart contract. [3]

Automated Market Makers Technology

On traditional exchanges, buyers and sellers negotiate prices from individual reserves or market makers, using a central limit order book. Automated Market Makers (AMMs) take a different approach. AMMs gather liquidity from various users in a shared pool, known as a . [11]

Users contribute equal amounts of multiple tokens to this pool through a smart contract. AMMs, prevalent in , often use a "constant product market maker" formula to maintain token prices in these pools. Joining a liquidity pool is accessible to anyone with a self-custody wallet and compatible tokens. Participants earn a share of trading fees by locking their tokens in the pool, proportional to their contribution. [11]

Liquidity Pools

Liquidity pools are a crowdsourced collection of assets that the AMM uses to trade with people buying or selling one of these assets. The users that deposit their assets to the pools are known as (LPs). [10][12]

Liquidity is essential for AMMs to function properly. If an AMM doesn’t have a sufficient liquidity pool, it can create a large price impact when traders buy and sell assets on the DeFi AMM, leading to capital inefficiency and impermanent loss. To incentivize liquidity providers to deposit their crypto assets to the protocol, AMMs reward them with a fraction of the fees generated on the AMM, usually distributed as LP tokens. The practice of depositing assets to earn rewards is known as [12]

Popular AMMs

Kyber Network

is a liquidity aggregator that connects to various AMMs and DEXs. It aims to provide users with the best available rates by sourcing liquidity from multiple platforms. In early 2018, the  was one of the first AMMs to introduce automated liquidity pools to the crypto ecosystem[8].


is one of the pioneering and widely used decentralized exchanges (DEX) powered by AMM technology. Developed by , it operates on the blockchain and allows users to trade various tokens directly from their wallets. [7]


is an automated portfolio manager and AMM platform on . It enables users to create with multiple tokens and varying weights, allowing for dynamic asset allocation. [5]


is a decentralized exchange optimized for trading on Ethereum. It aims to provide low-slippage trades for stablecoin pairs by using a specialized bonding curve. [2]

PancakeSwap (CAKE)

is a decentralized exchange running on the Binance Smart Chain (BSC). It mirrors the functionalities of Uniswap but operates on the BSC, offering users lower transaction fees compared to Ethereum. [2]

SushiSwap (SUSHI)

is a and AMM platform built on the blockchain. It offers features similar to Uniswap but includes additional functionalities such as and . [2]

Uses of AMMs

As a -based innovation, Automated Market Makers (AMMs) facilitate decentralized and trustless trading without the need for intermediaries. Users benefit from an experience without sign-up requirements, the need to disclose sensitive information, or reliance on a third party for fund custody—only a self-custody wallet is necessary. [11]

AMMs provide traders with convenient access to a wide array of trading pairs not found on traditional exchanges. Additionally, associated with AMMs enable the simultaneous trading of multiple assets, allowing for the execution of more complex trading strategies. The algorithmic setting of asset prices in AMMs mitigates pricing risks typically associated with centralized exchanges, such as frontrunning asset releases. [11]

Also, the open-source nature of AMMs allows for their integration into various protocols, including lending and borrowing, contributing to the adaptability and versatility of these decentralized trading mechanisms. [3][11]

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Automated Market Maker (AMM)

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Edited On

January 4, 2024

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