Why Do Decentralized Exchanges (DEXs) Often Use Automated Market Makers (AMMs) Instead of Traditional Order Books?

AMMs are favored by DEXs because they eliminate the need for traditional market makers and the centralized infrastructure of an order book. They use liquidity pools and mathematical formulas (like $x y=k$) to determine asset prices and execute trades.

This model is inherently resistant to the "shallow book" problem of traditional order books in low-volume assets, ensuring continuous liquidity. However, this mechanism introduces a different form of cost known as 'impermanent loss' and often higher price impact (slippage) for large trades.