Automated market makers (AMMs) have redefined how cryptocurrency is traded. Unlike traditional exchanges, these systems don’t depend on buyers and sellers matching orders. Instead, trading happens through smart contracts that calculate prices with a fixed formula. That means users can trade anytime, with no need for a central operator.
Nowadays, AMMs have become one of the most used systems in decentralized finance. With easy access, support for a wide range of tokens, and open participation from users worldwide, AMMs have enabled global trading that doesn’t rely on human interaction or traditional finance structures.
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What is an Automated Market Maker?
An AMM is a type of decentralized exchange. It uses smart contracts rather than human activity to decide prices and match trades. Unlike traditional order books, where traders post bids and offers and then wait for matches, AMMs carry out trades automatically using preset rules.
These rules allow for trading at any time without any delays. Traders interact directly with the code, which handles the entire process. As a result, AMMs can handle huge volumes of trades. Users don’t need to create an account, go through approvals, or interact with a third party.
Fees are collected from each trade and are paid to those who contribute assets to the system. These participants are called liquidity providers. All actions, including fees, are recorded on the blockchain and remain transparent. The system is designed to be open to anyone, anywhere in the world.
How AMMs Work on a Technical Level?
Instead of using people to decide prices, AMMs rely on something called a liquidity pool. These are smart contracts that hold equal values of two different cryptocurrencies. When someone wants to trade, they use this pool directly. The trade changes the balance of tokens in the pool, and the formula automatically adjusts the price.
The most commonly used formula is x * y = k. In this formula, x and y are the amounts of two different tokens in the pool. The value of k never changes during trading. This formula ensures that every trade affects the price in a predictable way. If one token is taken out, its price goes up because its supply in the pool has gone down.
This approach removes the need for human interaction or negotiation. Prices adjust based on demand. If more people want to buy one token, its price increases due to the formula. Everything happens automatically as the smart contract updates pool values in real-time.
Why Liquidity Pools Matter?
Every AMM relies on liquidity pools to work. These pools are open to anyone. A user can contribute an equal dollar amount of two tokens – for example, ETH and USDC – to a pool. In exchange, they get a share of the trading fees generated from others using that pool.
This system rewards users who lock their tokens in AMM platforms. The deeper the liquidity in a pool, the smoother the trades. Higher liquidity means larger trades can happen with less price change, which is important for keeping prices fair.
Liquidity providers take on risk because the ratio between the tokens can shift depending on trading activity. However, the chance to earn fees keeps users interested in contributing to these pools. Their role is central to keeping AMMs functioning.
Read also: Raydium Crashes 30% as Pump.fun Prepares Its Own AMM
Trading With an AMM in Practice
To understand how trading works, consider a person who wants to exchange $100 worth of USDC for ETH. They go to a site like Uniswap and select USDC as the token they have, and ETH as the one they want. The system shows the current rate, calculated instantly based on the liquidity pool formula.
Once the user confirms the trade, the smart contract receives the USDC and sends back the appropriate amount of ETH. The pool’s balance updates and the formula adjusts the price again. All this happens in seconds, with no manual steps.
Every trade changes the pool’s makeup, which shifts the token prices slightly. This continues with each new trade, always keeping the formula balanced. Users see the new rates immediately and can choose to trade or wait.
Why AMMs Matter for Everyday Crypto Users
AMMs remove the barriers that traditional exchanges often create. There are no waiting periods, no approvals, and no limit on who can use the platform. Anyone with a supported wallet and internet access can trade.
Another key point is variety. AMMs support thousands of trading pairs. Some are well-known, like BTC or ETH, while others are new tokens just launched by developers. As long as there’s a liquidity pool, trading is possible.
The system also avoids censorship. Since trades are run by code on public blockchains, they can’t be blocked by a company or government. This adds a layer of independence that appeals to many in the crypto space.
