Automated market maker

An automated market maker (AMM) is a system, common in decentralised exchanges, that prices and settles trades using a mathematical formula and a pooled reserve of assets rather than a traditional order book. Instead of matching individual buyers and sellers, traders transact directly against a liquidity pool, and the formula—often a constant-product rule like x·y=k—adjusts the price automatically as the pool balances change.

Larger trades move the price more, producing slippage. Prices are kept roughly aligned with outside markets by arbitrage. A common misconception is that AMM prices come from an external feed; they are set purely by the pool ratios and the trades that occur.