Quick answer
An automated market maker uses a smart contract and pricing formula to quote swaps from available liquidity.
What is Automated market maker?
An automated market maker, or AMM, lets users trade against a liquidity pool rather than a traditional central order book. The pool’s assets and formula determine the quoted exchange rate.
The useful way to approach this term is to separate its definition from the assumptions people often attach to it. In crypto, the same word can appear in a protocol rule, a user interface, a market-data label, or a marketing claim. Check which layer the explanation is describing.
Why does automated market maker matter?
AMMs make permissionless swaps possible, but price impact, arbitrage, impermanent loss, fees, oracle assumptions, and contract bugs affect the result.
Concrete example
See it in a real situation
A constant-product pool quotes a token swap using the relative reserves of two assets. A large trade changes those reserves and therefore changes the next quoted price.
Common misconceptions
What this term does not mean
- An AMM is not a guarantee that a token can be sold at the displayed price.
- The pool’s liquidity providers do not necessarily receive a risk-free fee stream.
Related terms
Sources and further reading
Definitions are written for education and checked against the sources below where relevant. A source can explain a protocol or rule without endorsing every product built around it.