AMM

« Index

AMM

DeFi Strategies • Yield Models • Token Income

algorithmic liquidity pool system

Automated Market Maker — AMM

An AMM is a decentralized trading system that allows users to swap tokens without a traditional order book. Instead of matching buyers and sellers directly, an AMM uses algorithmic liquidity pools — where users deposit token pairs — and prices are determined by mathematical formulas (like constant product: x * y = k). AMMs let anyone be a liquidity provider and earn fees, helping power the backbone of DeFi.

Use Case: AMMs allow tokens to be traded instantly and permissionlessly, enabling DEXs and yield farming strategies across multiple blockchain ecosystems.

Key Concepts:

• Liquidity Pool — Pooled token reserves that enable decentralized trading
• Token Pair — Two assets combined in equal value to create tradeable liquidity
• Swap Fee — Transaction fee paid by traders and distributed to liquidity providers
• Impermanent Loss — Temporary value divergence when providing liquidity in volatile pairs
• Constant Product Formula — Mathematical algorithm (x * y = k) that determines swap prices
• Passive Income — Fees earned by liquidity providers without active management

Summary: AMMs revolutionized DeFi by replacing centralized order books with algorithmic liquidity pools. They enable permissionless trading, democratize market-making, and create passive income opportunities for anyone willing to provide liquidity — making decentralized exchanges accessible, efficient, and resilient.

Feature	AMM	Order Book
Trading Method	Instant swap via pool pricing	Buyer/seller matching
Liquidity Source	User-deposited pools	Market makers or traders
Price Discovery	Algorithmic (x * y = k)	Bid/ask spread
Accessibility	Permissionless, decentralized	Centralized or hybrid systems
Examples	Uniswap, PancakeSwap, XRPL AMM	Binance, Coinbase, Traditional DEX

« Index