Automated Market Maker
a.k.a. AMM
A trading system that sets prices with a formula and a pool of tokens, instead of matching buyers with sellers.
An automated market maker (AMM) lets you swap one token for another without anyone on the other side of your trade. Instead, people deposit pairs of tokens into a liquidity pool, and a smart contract trades against that pool using a formula.
The best-known formula keeps the two piles in balance: buy one token out of the pool and it gets scarcer there, so its price climbs for the next buyer. Big trades in a small pool shove the price hard, which is why you see warnings about "price impact" and slippage.
AMMs power decentralized exchanges such as Uniswap and PancakeSwap. The people who fill the pools earn a slice of every trade's fee.
A swap that moves the pool
- A pool holds 10 ETH and 30,000 USDC, so 1 ETH is priced around 3,000 USDC.
- You want 1 ETH. To keep the formula balanced, the pool makes you pay a bit more than 3,000 because taking ETH out makes it scarcer.
- After your trade the pool holds about 9 ETH and roughly 33,300 USDC, so the next ETH costs around 3,700.
Bottom line: In a small pool, your own trade pushes the price against you. Deeper pools move less.
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