AMM (Automated Market Maker)
DeFi
On chain pools that set prices from token balances.
An AMM is a smart contract that holds two or more tokens and uses a formula to set prices. Traders swap against the pool, and the reserves change after each trade. Fees go to liquidity providers, who supply the tokens so the pool can function. AMMs work well for many assets and long tail tokens because they do not need a central order book. Liquidity providers should learn the basics of impermanent loss and fee dynamics before they deposit funds.
Frequently asked questions
How do AMMs set prices?
They use formulas like x*y=k or concentrated ranges. When someone trades, reserves shift and the price updates based on the math.What is impermanent loss?
When prices move, an LP’s pool shares can be worth less than just holding the tokens. Fees can offset this, but not always.How can I reduce slippage?
Trade smaller sizes, use deeper pools, or split the trade. Aggregators can route across pools for a better effective price.