What is AMM?

Plain-English explainer · Updated 2026-05-03 · By DeFi Intel

Last reviewed 2026-05-03

Used by: PancakeSwap AMM, DODO AMM, PancakeSwap AMM V3

Entity coverage: 7 protocols, 0 tokens, 0 chains reference this concept.

First defined in: Uniswap v3 Core (2021) by Hayden Adams et al.

An automated market maker is a smart-contract-based exchange that prices assets via a deterministic formula instead of an order book. Liquidity providers deposit token pairs into pools and earn a share of swap fees.

Uniswap v2 popularized the constant-product (x*y=k) AMM in 2020. Variants include Curve's StableSwap (low-slippage between like-priced assets) and Uniswap v3's concentrated liquidity (CLMM).

How it works

Liquidity providers deposit two tokens into a pool contract and receive LP tokens recording their pro-rata share. The pool holds reserves x and y, and in the constant-product design enforces x*y = k: the current price is simply the ratio of the reserves.

When a trader sends in token A, the contract first deducts the swap fee (added to reserves for LPs), then computes exactly how much of token B can leave so the invariant still holds. Because output comes off a curve, larger trades relative to pool depth get worse effective prices — that is slippage, or price impact. There are no quotes to accept or cancel; the formula is the market maker.

Arbitrageurs keep the pool honest: whenever the pool price drifts from external markets, they trade against it for profit until it realigns — which is also the source of LPs' impermanent loss when the two assets diverge. LPs exit by burning their LP tokens for their share of reserves plus accrued fees. Variants reshape the curve: StableSwap flattens it near a peg, while concentrated liquidity lets LPs quote only within chosen price ranges.

Why it matters

AMMs are the core innovation that made on-chain trading viable. They eliminate the need for off-chain matching engines and central market makers.

Real-world examples

Uniswap (CPMM v2, CLMM v3, hooks v4), Curve (StableSwap), Balancer (weighted pools), Aerodrome, Trader Joe (Liquidity Book).

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