AMM

An Automated Market Maker (AMM) is a decentralized exchange protocol that uses algorithmic formulas and liquidity pools rather than order books to facilitate cryptocurrency trading. Instead of matching buyers and sellers, AMMs allow users to trade directly against pooled capital provided by liquidity providers who earn fees. The pricing mechanism is determined by mathematical formulas (typically x*y=k) that adjust prices based on pool ratios, creating continuous liquidity without requiring traditional market makers. Example: Uniswap is the most prominent AMM on Ethereum, where users deposit equal values of token pairs into liquidity pools, and traders exchange tokens directly against these pools while liquidity providers earn proportional trading fees. Why it matters for DeFi: AMMs democratized market-making by eliminating gatekeepers and allowing anyone to become a liquidity provider and earn fees. They enabled permissionless token trading, reduced friction in DeFi ecosystems, and became the foundational infrastructure supporting the explosive growth of decentralized finance.

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