What Are Automated Market Makers (AMMs)?

Last updated August 30, 2021

Automated Market Makers (AMMs) are a DEX mechanism that allow traders to swap tokens by using a predefined algorithm. As we have seen through the evolution of DEXs and Uniswap's growing popularity, AMMs have several advantages. They allow DEXs to benefit from greater liquidity and for any user to easily deposit their tokens into an AMM liquidity pool, thus democratizing market-making participation.

Being built on decentralized networks, AMMs remove the middleman from trading, allowing users to interact without a centralized operator or custodian. As they don't rely on complex order book interfaces, AMMs provide users with a simple way to efficiently execute swap transactions. AMMs have brought significant advantages to decentralized finance. However, they are not without their flaws, particularly when it comes to order execution and price efficiency.