Glossary

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Glossary: Automated Market Maker (AMM)

An automated market maker, or AMM, is a type of decentralized exchange system that uses smart contracts and liquidity pools to let users trade crypto assets without a traditional order book.

What is an Automated Market Maker (AMM)?

An automated market maker, or AMM, is a type of decentralized exchange system that uses smart contracts and liquidity pools to let users trade crypto assets without a traditional order book.

Automated Market Maker (AMM) Explained

An AMM is a system that lets people trade crypto without needing another person to match their exact trade.

Instead of buyers and sellers placing orders, users trade against a pool of tokens. This pool is supplied by other users called liquidity providers.

A smart contract sets the price based on how much of each token is in the pool.

For example, if many people buy one token from the pool, that token becomes more expensive because there is less of it left.

What an Automated Market Maker (AMM) Means For

Audience	Use Case
DeFi traders	Swap tokens directly from a wallet without waiting for a buyer or seller to match the trade.
Liquidity providers	Deposit token pairs into liquidity pools and earn fees from trades that use those pools.
Protocol and token teams	Create on-chain markets for tokens without needing a centralized exchange listing.

Examples

A user swaps ETH for USDC on a DEX that uses an AMM instead of an order book.
A liquidity provider deposits ETH and USDC into a pool and earns a share of trading fees.
A new token project creates a liquidity pool so users can start trading the token on-chain.
A trader sees that buying a large amount of a token from a small pool causes price slippage because the AMM adjusts the price automatically.

FAQs

What does AMM stand for?

AMM stands for automated market maker.

What is an AMM used for?

An AMM is used to let users swap crypto tokens through smart contracts and liquidity pools.

How does an AMM set prices?

An AMM sets prices based on a formula and the amount of tokens available in a liquidity pool.

Who supplies tokens to an AMM?

Liquidity providers supply tokens to AMM pools and usually earn trading fees in return.

Is an AMM the same as a DEX?

Not exactly. An AMM is one type of system that many DEXs use to enable token trading.

Related Terms

A/B Testing

An experiment that compares two versions of a page, feature, or campaign to see which performs better.

Account Abstraction

Account abstraction is an approach that turns blockchain accounts into programmable smart contract wallets, enabling features like gasless transactions, social recovery, session keys, and paying fees in any token.

Activation Rate

Activation rate is the percentage of new users or wallets that complete a key activation milestone, such as a first transaction, out of all users who signed up or connected within a given period.