What Are the Primary Mechanisms through Which Automated Market Makers (AMMs) Facilitate Token Swaps?

AMMs facilitate token swaps using liquidity pools and a deterministic pricing algorithm. Instead of a traditional order book, users trade against a pool of tokens supplied by liquidity providers.

The price is determined by a formula, most commonly the constant product formula (x y=k), where 'x' and 'y' are the quantities of the two tokens in the pool. Each trade alters the ratio of tokens in the pool, causing the price to adjust automatically for the next trade, ensuring continuous liquidity.