Uniswap is a prime example of how automated market makers work. Automatically swap assets between traders and liquidity pools using smart contracts.Use an algorithm, usually x * y = k, to provide everyone trading with the pool a constant price.Incentivize users in a process called yield farming to deposit crypto assets in liquidity pools.In contrast, AMMs do quite a few things differently. Traditional exchanges require buyers and sellers to meet at an overlapping price point on a centralized order book. The exact mechanics vary from exchange to exchange, but generally, AMMs offer deep liquidity, low transaction fees, and 100% uptime for as many users as possible.Īn easy way to understand AMM-based exchanges is to consider how they differ from traditional exchanges. An algorithm offers everyone the same price when buying cryptoĪutomated market makers (AMM) are decentralized exchanges that pool liquidity from users and price the assets within the pool using algorithms.Crowdsourced liquidity pools replace order books + buyers/sellers.Uniswap, Sushi, Balancer, and Curve Finance are a few top crypto decentralized exchanges using the AMM model to deliver DeFi to the masses.Įach AMM takes a slightly different approach, but the general idea is the same. In 2021, AMM-based exchanges are processing billions of dollars worth of on-chain transactions every day. In contrast, AMM exchanges crowdsource liquidity and use smart contracts to execute trades.
Traditional exchanges require buyers, sellers, and a central reserve of assets. As a sub-lesson of decentralized exchanges, (objectively the most important DeFi use case) we will resume covering DEXs by further exploring automated market makers (AMM).Īutomated market makers (AMM) enable unstoppable, automated, and decentralized trading using algorithms to price assets in liquidity pools.
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