Automated market maker (AMM)
Definition
A smart contract that sets asset prices algorithmically from pooled reserves, letting users trade against the pool instead of a traditional order book.
An automated market maker (AMM) is a smart contract that holds on-chain reserves of assets and lets users trade against them at prices set by a formula rather than by matching buyers and sellers. Many AMMs, such as those pioneered by Uniswap, use a constant product formula written as x times y equals k, where the product of the two reserve balances stays constant and each trade shifts the price along that curve.
Why it matters
AMMs made continuous, permissionless trading possible without a central order book or market-making firm. Anyone can supply assets to the pool and anyone can trade, which broadened access to token markets. The design also has consequences: large trades relative to pool size cause significant price slippage, and thinly funded pools are easy to manipulate. Understanding that price comes from the formula, not an external quote, helps users anticipate slippage. Newer AMM designs add features such as concentrated liquidity, which lets providers focus their funds within a chosen price range to improve capital efficiency, but the underlying principle of pricing from pooled reserves remains the same.
Common misunderstanding
Traders sometimes expect an AMM to fill orders at a single quoted price like a stock exchange. Instead the price moves continuously as the trade consumes reserves, so a large swap can execute at a much worse average price than the starting one. The formula, not supply and demand from other traders, sets the rate.
Related terms
See liquidity pool, impermanent loss, DeFi and ERC-20.
Frequently asked questions
What is the constant product formula?
Note: CamoCrypt is security & education only — no prices, no predictions, no investment advice. Verify every address and contract yourself; we cannot recover lost funds and neither can anyone who contacts you claiming they can.