AMM (Automated Market Maker)
Permissionless trading powered by math and liquidity pools
Definition
An Automated Market Maker (AMM) is a type of decentralized exchange (DEX) protocol that uses mathematical formulas rather than an order book to price assets and execute trades. Instead of matching buyers with sellers, AMMs use liquidity pools — funds deposited by liquidity providers. The most common formula is x × y = k (constant product formula). AMMs like Uniswap enable permissionless trading 24/7 without a central authority.
Formula / Rules
x × y = k (where x and y are pool reserves, k is constant)
Example
Uniswap's ETH/USDC liquidity pool contains $10M of ETH and $10M of USDC (k = 100 trillion). When a trader buys ETH with USDC, the USDC balance increases and the ETH balance decreases. The price of ETH rises automatically to maintain the constant product k. Liquidity providers earn trading fees proportional to their pool share.
Related Terms
Frequently Asked Question
What is an AMM?
An AMM is a decentralized exchange protocol using math formulas instead of order books. Liquidity providers deposit token pairs into pools; traders swap against the pool, with prices adjusting automatically by formula.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.