What it is
Instead of traditional order books where buyers and sellers are matched, AMMs allow users to trade against a liquidity pool. The price of assets within the pool is determined by an algorithm based on the ratio of the tokens in the pool. When a trade occurs, the balance of tokens shifts, and the algorithm automatically adjusts the price to maintain a constant product or similar formula.
AMMs are fundamental to most decentralized exchanges (DEXs) within the DeFi ecosystem, enabling constant liquidity for trading. News often focuses on the total value locked (TVL) in AMM pools, new AMM models, or liquidity provider incentives. Retail investors interact with AMMs directly when trading on a DEX or indirectly when providing liquidity, where they face risks like impermanent loss.
Why it matters
AMMs power decentralized trading and liquidity provision, offering opportunities for investors but also introducing specific risks like impermanent loss.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice