Automated Market Makers
market type
Automated Market Makers (AMMs) are decentralized trading protocols that use smart contracts and mathematical formulas to facilitate token swaps without order books. Prices are determined algorithmically based on the ratio of tokens in a liquidity pool, making peer-to-contract trading possible at any time without requiring a centralized intermediary.
Use Case: A trader swaps $USDC for $AVAX on Pangolin, an AMM on the Avalanche network. The AMM recalculates the price based on the current pool balance, executes the trade instantly, and updates the pool ratio—all without an order book or human counterpart.
Key Concepts:
- Liquidity Pools — Token reserves used to execute trades programmatically.
- Constant Product Formula — The core pricing logic: x * y = k.
- Permissionless — Anyone can trade or become an LP without approval.
- Slippage — Price change caused by trade size relative to pool depth.
Summary: AMMs are foundational to decentralized finance, allowing 24/7 global trading without custodians. By removing order books and automating price discovery, they empower users to access liquidity and earn yields in open, programmable ways.