Automated Market Maker
An Automated Market Maker (AMM) is a decentralized exchange protocol that uses mathematical formulas and smart contracts to automatically set asset prices and facilitate trading without traditional order books. It relies on liquidity pools where users deposit token pairs, enabling continuous, permissionless trading based on algorithms like the constant product formula (x*y=k). This innovation powers decentralized finance (DeFi) platforms by providing liquidity and price discovery in a trustless manner.
Developers should learn about AMMs when building or interacting with DeFi applications, as they are foundational to decentralized exchanges like Uniswap and PancakeSwap. Understanding AMMs is crucial for implementing trading features, liquidity provision mechanisms, and optimizing token economics in blockchain projects, especially in scenarios requiring automated, non-custodial asset swaps.