What Is an Automated Market Maker (AMM) and How Does It Generate a Virtual Bid-Ask Spread?

An AMM is a decentralized exchange protocol that uses a mathematical function (e.g. $x y = k$) to price assets instead of a traditional order book.

It generates a virtual bid-ask spread through its "slippage" mechanism. When a trade is executed, the price moves along the curve, and the price impact (slippage) plus the protocol fee effectively acts as the cost of the spread, which is paid to the liquidity providers.