An Automated Market Maker, or AMM, is a way to trade digital assets without relying on a traditional buyer-meets-seller system. Instead of matching two people in real time, AMMs use liquidity pools (smart contract-based reserves of tokens that anyone can contribute to). When you trade on an AMM, you're swapping directly with this pool, and the price is set automatically using a mathematical formula that balances the ratio between the two assets.
AMMs power many decentralized exchanges (DEXs) and are one of the reasons DeFi works without middlemen. Anyone can become a liquidity provider by depositing tokens into a pool, and in return, they earn a portion of the trading fees. There’s no centralized order book, no company setting prices, and no gatekeepers deciding who can participate. The entire system runs on open code, available for anyone to use, audit, or build upon.
AMMs reflect both the potential and the complexity of decentralized systems. They’re a cornerstone of DeFi innovation and a signal that financial policy will need new tools to match the pace of change. Learn more about AMMs in our podcast episode dedicated to AMMs.