Automated Market Maker (AMM)

What Is an Automated Market Maker?

An Automated Market Maker (AMM) is a system that was first introduced by Shearson Lehman Brothers and ATD in the early 1990s. Before the invention of AMMs, order books were manually created by humans in order to improve market liquidity. However, this manual approach resulted in slippage and latency in price discovery, as well as accusations of market manipulation against market makers. The introduction of AMMs effectively addressed these issues. Today, AMM systems are also being implemented in decentralized exchanges that are based on blockchain technology.

In decentralized exchanges that are based on AMMs, the traditional order book is replaced by liquidity pools that are pre-funded on-chain for both assets of the trading pair. These liquidity pools are provided by other users, who earn passive income through trading fees based on the percentage of liquidity they contribute to the pool.

One example of a decentralized exchange that has implemented an AMM is Uniswap. Uniswap is a decentralized exchange that is based on the Ethereum blockchain. It allows users to both provide liquidity and earn passive income, as well as exchange between different assets.