An automated market maker is a type of decentralized trading mechanism that uses mathematical formulas, rather than human market makers, to price and execute trades between tokens. Instead of relying on traditional order books, AMMs use liquidity pools—pairs of tokens supplied by users—to determine prices based on the ratio of assets in the pool.
When a trader swaps one token for another, the pool’s balance changes, and the AMM algorithm adjusts prices automatically to reflect supply and demand. Popular models like Uniswap’s constant product formula (x × y = k) maintain liquidity at all price levels within the pool.
AMMs make decentralized exchanges (DEXs) possible by allowing anyone to trade or provide liquidity directly through smart contracts, ensuring continuous market activity without intermediaries.