Automated Market Maker
A decentralized exchange mechanism that prices assets using a liquidity pool and mathematical formula instead of a traditional order book.Definition
A decentralized exchange mechanism that prices assets using a liquidity pool and mathematical formula instead of a traditional order book.Why it matters
DeFi concepts explain blockchain-based markets, lending, trading, liquidity, and financial automation.How it works
The protocol creates a smart contract containing two or more assets. When a user deposits or swaps, the contract recalculates the price using a mathematical model. This process ensures the pool always has assets available for traders at a price that reflects the broader market.Real-world example
Curve Finance, which uses an optimized algorithm for stablecoin swaps to minimize price slippage.Advantages
- 24/7 market accessibility
- Decentralized price discovery
- Passive income for providers
Limitations
- Risk of impermanent loss
- Exposure to smart contract bugs
- Front-running risks
Common misconceptions
- Many people believe AMMs require a human market maker to function.
- Others think liquidity provision is risk-free earning.
Related knowledge
- Smart Contract — term
Canonical knowledge ID:
glossary:automated-market-maker