Definition
AMMs replace traditional order books with algorithmic pricing using formulas like the constant product (x*y=k). When a trade occurs, the AMM automatically adjusts prices based on the changing ratio of tokens in the pool. AMMs enable trading without counterparties and 24/7 market access. Key innovations include concentrated liquidity (Uniswap v3), weighted pools (Balancer), and stableswap curves (Curve Finance).
lightbulb Example
On Uniswap, a user swaps 1,000 USDC for ETH without needing a buyer on the other side. The AMM algorithm calculates the exchange rate based on the pool's reserves, executes the swap instantly, and adjusts the price for the next trade.
verified_user Key Points
- Replaces order books with algorithmic pricing
- Constant product formula: x × y = k
- 24/7 trading without counterparties
- Key DEXs: Uniswap, Curve, Balancer