Automated market maker (AMM)

An automated market maker is a type of decentralised exchange that prices trades using a mathematical formula and a pool of tokens, instead of matching buyers and sellers. The classic design, used by Uniswap v2, keeps the product of the two token balances constant (x × y = k). As you buy one token from the pool, its balance falls and its price rises along a curve.

Anyone can become a liquidity provider by depositing both tokens and earning a share of trading fees. Arbitrage traders keep pool prices in line with other markets by buying when a pool is cheap and selling when it is expensive.

Large trades relative to pool size suffer price impact. Later designs, such as Uniswap v3's concentrated liquidity and curves specialised for stablecoins, aim to use capital more efficiently.