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How Does an ‘Automated Market Maker’ (AMM) Work?

An AMM uses a mathematical formula (like x y=k) and liquidity pools to determine asset prices on a DEX.
Greeks.live05.12.25

How Does an ‘Automated Market Maker’ (AMM) Work?

An AMM is a protocol that manages a decentralized exchange (DEX) by using a mathematical formula, rather than an order book, to determine the price of assets. Liquidity providers supply tokens to pools, and the AMM's constant product formula (e.g. x y = k) ensures there is always liquidity for a trade, adjusting the price based on the pool's ratio.

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Glossar

AMM

Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.

Decentralized Exchange

Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.

Constant Product Formula

Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) like Uniswap, dictates the relationship between the reserves of two tokens within a liquidity pool.

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