How Do Automated Market Makers (AMMs) in DeFi Replace Traditional Market Makers?

AMMs use a mathematical formula, such as $x cdot y = k$, and liquidity pools to determine asset prices and facilitate trades. They replace the human decision-making and inventory management of traditional market makers.

Instead of profiting from a bid-offer spread, AMMs earn a fee from each transaction, which is distributed to liquidity providers. The price impact acts as the effective spread.