AMM
An automated market maker is a DeFi protocol that uses liquidity pools and algorithms to price and swap crypto assets without a traditional order book.
AMM stands for automated market maker, a type of decentralized exchange mechanism used in DeFi. Instead of matching buyers and sellers through an order book, an AMM lets users trade against pools of tokens supplied by other users. Prices are set by a formula, often based on the ratio of the assets in the pool, so trades can happen automatically through smart contracts.
AMMs matter because they make token swaps available without a centralized exchange or dedicated market maker. Liquidity providers deposit assets into a pool and may earn fees from trades, while traders can swap tokens directly from their wallet. For example, in an ETH/USDC pool, buying ETH with USDC reduces the amount of ETH in the pool and increases the amount of USDC, causing the price to adjust. This design improves access to liquidity, but users should understand risks such as slippage, smart contract bugs, and impermanent loss for liquidity providers.
Other terms in DeFi
Aggregator
A DeFi service that searches multiple protocols to find better prices, routes, or yields for a user’s transaction.
DEX
A decentralized exchange is a crypto marketplace where users trade directly from their wallets using smart contracts instead of a central intermediary.
DeFi
A blockchain-based financial ecosystem that lets people lend, borrow, trade, and earn yield without traditional banks or brokers.
Flash Loan
A flash loan is an uncollateralized DeFi loan that must be borrowed and repaid within the same blockchain transaction.