Automated Market Maker (AMM) [Updated]

An Automated Market Maker, or AMM, is a type of software that lets people trade cryptocurrencies directly with a computer program — no human broker, no traditional order book, no counterpart you need to wait for. Instead of matching buyers with sellers the way a stock exchange does, an AMM uses a pool of tokens and a mathematical formula to set the price automatically based on supply and demand at any given moment. This makes trading available around the clock, for anyone in the world, without needing a central company to run it.

The most common formula powering AMMs is deceptively simple: it says that the product of two token quantities in a pool must always stay constant. If you take tokens out of one side, you have to add tokens to the other side to keep that product the same. This ratio between the two sides is what determines the price. The more you try to buy of a particular token, the more expensive it becomes, because you are shifting the balance of the pool. This elegant mechanic means prices always adjust to reflect how much pressure buyers and sellers are putting on the pool.

AMMs were a breakthrough because they removed the need for trust in a central party. Platforms like Uniswap, Curve, and Balancer are built on AMMs, and together they handle billions of dollars in trading volume every day. Because everything runs on code, anyone can verify the rules, and no one can change prices in a hidden or arbitrary way.

Example: Imagine a vending machine that sells orange juice and accepts water in return. If many people take orange juice out, the machine raises the price of orange juice and lowers the price of water to rebalance. You do not need a shopkeeper — the machine handles everything automatically, and the ratio of liquids inside determines the price at any moment.