All terms
An automated market maker, which prices trades with a formula instead of an order book.
An AMM holds two or more assets in a pool and quotes prices from a formula. The classic version keeps the product of the two balances constant, so buying one side raises its price automatically.
This was the breakthrough that made onchain trading viable. It needs no counterparty waiting on the other side, just liquidity sitting in a contract.
In a pool with 10 ETH and 30000 USDC, buying ETH removes ETH and adds USDC, which raises the ETH price for the next buyer.
That an AMM finds you the best price. It quotes from a formula and the balance of one pool, so a large trade against a small pool prices itself badly no matter what the wider market says. Aggregators exist because a single pool is not a market.
Common questions
How does an AMM set a price with no buyers and sellers?
Why do large trades get worse prices on an AMM?
Where to go next
More defi terms
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