Automated Market Maker (AMM)

An automated market maker (AMM) is the pricing engine behind most decentralised exchanges. Instead of matching buyers with sellers through an order book, an AMM holds two or more tokens in a shared liquidity pool and quotes prices from a formula based on the pool balances. The best-known design, the constant product model, keeps the multiplied value of the two reserves roughly constant, so every trade moves the price along a curve. Anyone can trade against the pool at any time, and anyone can deposit tokens to become a liquidity provider and earn a share of the trading fees. Large trades relative to pool size cause noticeable slippage, and liquidity providers carry impermanent loss risk.