An automated market maker (AMM) is the engine behind most decentralised exchanges. Instead of matching buyers and sellers through an order book, an AMM uses a mathematical formula — typically constant-product: x * y = k — and a pool of tokens to set prices and execute trades automatically.
Liquidity providers deposit token pairs into the pool and earn a share of trading fees. The formula ensures the pool never runs out of either token; it simply adjusts the price as the ratio of tokens in the pool shifts with each trade.
The trade-off for liquidity providers is impermanent loss: if the relative prices of the two tokens diverge significantly, the pool leaves them with less value than simply holding the tokens outright. Understanding that risk is essential before providing liquidity.
Worked example
Uniswap uses an AMM model, so trading ETH for USDC draws from a pool of both tokens rather than matching individual buyer and seller orders.
Related guides
This definition is general education, not investment advice. Markets — especially crypto — are volatile and you can lose money. Please read our disclaimer and see our methodology.