> ## Documentation Index
> Fetch the complete documentation index at: https://docs.theblockchainlibrary.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Automated Market Maker

> A decentralized exchange mechanism that prices assets using a liquidity pool and mathematical formula instead of a traditional order book.

# 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](/generated/v2/glossary/smart-contract) — term

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**Canonical knowledge ID:** `glossary:automated-market-maker`