What Is an Automated Market Maker (AMM) and How Does It Determine Asset Prices?

An Automated Market Maker (AMM) is the underlying protocol that powers most decentralized exchanges (DEXs). Instead of using a traditional order book, AMMs rely on liquidity pools, where users deposit pairs of assets.

The price of assets in the pool is determined by a mathematical formula, most commonly the constant product formula (x y = k). As traders buy or sell, the ratio of assets in the pool changes, which in turn changes the price along the formula's curve.