What is an Automated Market Maker?

An automated market maker (AMM) is a type of decentralized exchange that runs on smart contracts, not order books. Traditional order books rely on buyers and sellers posting competing offers, and trades only happen when prices match. AMMs skip that back-and-forth by using code and math to price trades automatically, enabling fast, 24/7 onchain markets. What does an AMM do? At a glance, automated market makers (AMMs) give people a simple, secure way to trade crypto directly on the blockchain. They're easy to access, support a huge range of tokens, and — most importantly — they just work. For everyday users, AMMs offer several key benefits: a wide range of tokens, automated pricing, global accessibility, and the ability to earn fees by providing liquidity. How do AMMs work? AMMs use liquidity pools instead of order books. When someone makes a trade, they interact directly with a smart contract holding balances of two tokens. The AMM uses a mathematical formula to update prices based on the pool's balances. Smart contracts and liquidity pools At the core of every AMM is a set of smart contracts. These self-executing programs power trading logic with no centralized operator required. Anyone can become a liquidity provider by depositing equal values of both tokens into a pool. The constant product formula: x * y = k AMMs determine token prices using the constant product formula, ensuring liquidity and fair pricing without an order book.