What Is an Automated Market Maker (AMM)?

Cryptocurrencies have utilized the concept of decentralization for a variety of different services. A widely used service within cryptocurrencies is decentralized finance (DeFi) and is increasingly seen as an alternative to traditional, or centralized financial services (CeFi).

Since DeFi utilizes smart contracts, price negotiation among users may not be the cheapest and most efficient since constant updates are needed, leading to low liquidity. To solve this issue, a new exchanging protocol known as Automated Market Maker (AMM) has emerged. In this article, we are going to dive into the AMM and how it works. To understand the fundamentals of AMM, you first need to know what decentralized exchanges and market makers are.

What Is a Decentralized Exchange (DEX)?

Simply put, a decentralized exchange (DEX) is one which requires no third parties to regulate transactions. These types of exchanges offer various functions that are similar to traditional exchanges, such as order books, matching systems, or security functions. Usually, decentralized exchanges are developed and launched as decentralized applications (DApps) within a network like the Ethereum network.