Automated Market Maker (AMM)
A smart contract that enables decentralized trading by using liquidity pools instead of traditional order books.
Explained Simply
AMMs allow users to trade tokens without a centralized exchange or order book. Instead of matching buyers and sellers, AMMs use liquidity pools — pairs of tokens locked in a smart contract. Prices are determined by a mathematical formula (e.g., x*y=k for Uniswap). Anyone can provide liquidity to earn trading fees. AMMs revolutionized DeFi by enabling permissionless trading. Major AMMs include Uniswap, SushiSwap, and Curve. The trade-off is impermanent loss for liquidity providers.
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