Automated Market Maker

An Automated Market Maker, or AMM, is a programmatic marketplace that lets people trade tokens without a traditional order book. It uses smart contracts and pooled tokens to make trades run continuously. Liquidity providers deposit pairs of tokens into these pools and earn a share of trading fees for their contribution. The protocol sets prices with a formula instead of matching buyers and sellers. Many AMMs use a constant product rule such as x·y = k to keep the pool balanced. Traders interact with the pool and not with each other, so the exchange is always available like a vending machine that dispenses tokens on demand. This design reduces reliance on finding a matching counterparty and brings permissionless access for anyone with assets to trade. Liquidity pools create a deep well of funds that smooths small orders and speeds up execution. The algorithmic prices can diverge from wider market prices, which opens room for arbitrage traders to restore balance and in doing so help keep AMM prices aligned with the broader market. Liquidity providers earn rewards from fees and sometimes additional incentives that aim to compensate them for the risk they take. Yet risks remain and they are real. Impermanent loss happens when the relative price of tokens in a pool changes and a provider withdraws assets at a value lower than holding the tokens outside the pool. Mercenary liquidity is the tendency for providers to move funds chasing higher returns elsewhere, and that can thin pools and raise volatility. There are also smart contract risks and cases of front-running or slippage when large orders move the pool price sharply. Developers and the community try to reduce these harms with design changes like concentrated liquidity, dynamic fees, time-weighted pricing, and security audits. More than a tool, an AMM feels like a small economy. It sets its own prices, rewards its supporters, and relies on a chorus of contributors to stay alive. For newcomers, AMMs open a path into decentralized finance where trading, liquidity provision, and protocol governance meet. They expand choice and push the idea that markets can be automated, transparent, and accessible to all who dare to join the pool.