How Do Automated Market Makers (AMMs) Differ from Traditional Order Book Exchanges in a Smart Contract Context?

Traditional exchanges use a central order book to match buyers and sellers based on their specified prices. AMMs, however, use a smart contract to pool assets (liquidity) and an algorithm to determine the asset price based on the ratio of assets in the pool.

Trades are executed directly against this pool, not against a specific counterparty's order. This allows for continuous, non-custodial trading without relying on a central entity.