AMM (Automated Market Maker)

An automated market maker (AMM) is a decentralized exchange design where users trade against liquidity pools instead of an order book. A smart contract holds reserves, calculates prices, and lets liquidity providers earn fees for supplying assets.

AMMs use different formulas for different markets. Constant-product pools are common for volatile pairs, stable-swap pools reduce slippage between similar assets, and weighted pools support more than two assets or non-50/50 allocations.

AMMs introduce risks including impermanent loss for liquidity providers, smart-contract bugs, oracle or routing issues, MEV, and high slippage when pool liquidity is shallow.