What Is an AMM?
An AMM, automated market maker, is the engine inside most DEXs. Instead of a human or an order book posting bids and asks, a pool of two tokens and a formula set the price. Uniswap's constant product (x times y equals k) is the famous version. You swap against the pool. Liquidity providers earn a fee for being the other side, and they take impermanent loss for the privilege.
How It Actually Works
- The bigger the trade relative to the pool, the worse the price. That curve is slippage. Thin pools are expensive and easy to manipulate. See liquidity pool.
- Aggregators such as Jupiter hop across many AMMs to find a better route. The AMM is still underneath.
- Concentrated liquidity (Uniswap v3 and copies) lets LPs pick a price range. Fees can be higher. So can the loss if price leaves the range.
Risks and Common Mistakes
- Providing liquidity because the APR looks like a savings rate. It is a market-making job. Run the IL calculator first.
- Swapping size through a memecoin pool and then blaming the UI. The formula did what thin liquidity always does. The memecoin page applies.
When It Matters
Every on-chain swap, and any time you are tempted to "just LP it." My Uniswap review is the canonical venue.
Related Terms
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