AMM (Automated Market Maker)

An AMM is a decentralized exchange design where trade prices are set by a mathematical curve over the token balances in a liquidity pool, not by matching buy and sell orders. The most famous is Uniswap's constant-product formula: x·y = k, where x and y are the pool balances of the two tokens. As you buy one, you must add to the other in a way that keeps the product constant — which prices your trade automatically.

AMMs won over on-chain order books because on-chain order books are expensive to run (every order placement is a transaction) while AMMs let anyone provide liquidity passively without actively managing quotes. Different AMM designs suit different assets: constant-product for volatile pairs, Curve's stable-swap for pegged assets like stablecoins, weighted pools for portfolios.

The trade-off is capital efficiency and price impact. A large trade against a small AMM pool moves the pool ratio significantly and gets a worse effective price than a similar trade on a deep order book. Concentrated liquidity (Uniswap v3, Curve StableSwap) tries to solve this by letting LPs specify a price range.