What is an automated market maker in crypto and how does it work?

An automated market maker, or AMM, is a type of decentralized exchange design where a smart contract quotes prices using a formula instead of an order book. Traders swap directly against a pool of tokens, and the formula decides how much they get back. The people who supply those tokens earn fees from every trade.

What is an automated market maker in crypto?

On a traditional exchange, a buyer's order must meet a seller's order. An AMM removes that step, quoting a price from how much of each token the pool holds. If you want the basics of pools themselves, see what a liquidity pool is. The rest of this guide focuses on the pricing formulas.

How do automated market makers work?

Constant product (x * y = k). This is the formula popularized by Uniswap. If x and y are the amounts of two tokens in a pool, their product k must stay the same, or rise, after every trade. When you buy token y, you add x and remove y, so y becomes scarcer and its price goes up. The bigger your trade compared with the pool's size, the more the price moves. That effect is called price impact.

Stableswap. Introduced by Michael Egorov in November 2019 and used by Curve, this curve is built for assets that should trade near 1:1, such as two dollar stablecoins. It blends a constant sum curve, which gives a fixed price, with a constant product curve. Near the peg the price barely moves even on large trades. If the pool becomes very unbalanced, the constant product part takes over, prices move more steeply and arbitrage traders have a reason to rebalance it. A setting called the amplification coefficient, A, controls how flat the curve is.

Concentrated liquidity. Uniswap v3, described in a March 2021 whitepaper, lets liquidity providers place their funds within a price range they choose. Inside that range, the position behaves like a constant product pool with much larger virtual reserves, so the same capital supports more trading. Outside the range, the position stops earning.

What is the source of yield with an automated market maker?

The main source of yield is trading fees. Every swap pays a fee, which is shared among the liquidity providers whose funds were used. In Uniswap v3 the standard fee tiers are 0.05%, 0.30% and 1%, and fees are split in proportion to each provider's share of active liquidity. Since a governance decision in December 2025, some Uniswap pools also send part of the fee to the protocol. For example, in a 0.30% pool, providers receive 0.25% and the protocol 0.05%.

What are the risks of providing liquidity to an AMM?

Because the formula rebalances the pool as prices move, a provider can end up holding more of the token that fell and less of the one that rose. This is impermanent loss, and fees may or may not make up for it. Concentrated positions earn nothing when the price leaves their range, and any AMM can be affected by smart contract bugs.