Market maker

AMMs use a formula instead of an order book for trading

Automated market makers (AMMs) replace traditional order books with algorithms that determine prices based on a mathematical formula. This formula typically involves the balance of supply and demand for a given asset, allowing for continuous trading without the need for a centralized order book.

Example

In a decentralized exchange like Uniswap, the price of a token is determined by the constant product formula, which ensures that the product of the quantities of the two tokens in the liquidity pool remains constant.

Remember this

AMMs simplify trading processes and enable continuous liquidity provision in decentralized markets.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

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