Definition
An AMM, short for Automated Market Maker, is a core decentralized finance concept that replaces traditional order books with algorithmic pricing based on liquidity pools. In an AMM, users trade directly against pooled assets held in smart contracts, with prices determined by a predefined mathematical formula. This design allows continuous on-chain trading without relying on centralized intermediaries or matching individual buyers and sellers.
AMMs are typically deployed on blockchain networks as smart contracts and are a foundational mechanism for many DEX platforms within DeFi. The behavior of an AMM—such as how prices move in response to trades and how sensitive it is to liquidity levels—is governed entirely by its underlying formula and pool configuration. Different AMM designs, including those optimized for stable assets or volatile pairs, define how efficiently assets can be swapped and how liquidity is distributed.
Context and Usage
Within DeFi, AMMs serve as the primary infrastructure enabling permissionless token swaps, liquidity provision, and various yield strategies. Protocols that use AMMs often integrate with broader DeFi ecosystems, where liquidity providers may participate in Yield Farming programs that distribute additional rewards for supplying assets to AMM pools. In this context, AMMs act as the underlying pricing and execution layer on which these incentive mechanisms are built.
Some specialized AMMs, such as those used by platforms like Curve, focus on particular asset types and tailor their formulas to minimize slippage for closely correlated tokens. AMMs are central to how a DEX functions, defining how trades are executed and how liquidity is organized on-chain. As DeFi evolves, AMM concepts are increasingly combined with newer primitives, including designs that interact with staking or Restaking frameworks, while still relying on the core idea of algorithmic, pool-based market making.