An AMM, or Automated Market Maker, is a type of decentralized exchange protocol used in cryptocurrency trading. It relies on algorithms to set prices and facilitate trades without the need for traditional order books. Instead of matching buyers and sellers directly, users interact with liquidity pools that hold a supply of tokens.
These liquidity pools are funded by users who deposit tokens into them, earning fees in return for providing liquidity. The AMM algorithm calculates the price of each token based on the ratio of tokens in the pool, ensuring that trades can always be executed. This model allows for continuous liquidity and trading, even during times of high volatility.
AMMs have gained popularity in the cryptocurrency space for their ability to provide liquidity and enable seamless trading without the need for a centralized intermediary. Popular examples of AMMs include Uniswap and SushiSwap, which have become integral parts of the decentralized finance (DeFi) ecosystem.
