An automated market maker (AMM) is a smart contractSmart contractA program that runs on a blockchain and automatically carries out what it was written to do once certain conditions are met. that buys and sells tokens according to a fixed formula, instead of people posting offers. It is the engine behind most decentralised exchangesDecentralised exchange (DEX)An exchange run by smart contracts, where people swap crypto straight from their own wallets with no company in the middle..
The term comes from the stock market. On Nasdaq Iceland, market makers (viðskiptavakar in Icelandic) are financial firms that continuously post both buy and sell offers for certain shares or bonds, so there is always someone to trade with. An AMM does the same job. The difference is that software and a pool of tokens supplied by usersLiquidity poolA shared pot of tokens held in a smart contract, which people trade against on decentralised exchanges. Those who fund it earn a share of the fees. take the place of the financial firm.
The formula x · y = k
The most common formula is simple. The pool holds two tokens, x of one and y of the other, and the product x · y must always stay the same (k). When you put one token in, the pool pays out exactly enough of the other to keep the product unchanged, apart from a fee.
Take a pool with 100 of token A and 100 of token B, so k is 10,000. To get 10 B, you have to put in about 11.1 A, because 111.1 · 90 ≈ 10,000. To get 50 B, you have to put in 100 A, because 200 · 50 = 10,000. The bigger the trade compared with the pool, the worse the price. This is called SlippageSlippageThe difference between the price you expected and the price your trade was actually carried out at..
The price in the pool only changes through trading. If it drifts away from prices on other markets, others profit by buying whatever is cheap in the pool until the prices line up again. Uniswap, which went live on Ethereum in November 2018, made this approach widely known.
AMM versus order book
On a traditional exchange, buyers and sellers meet in an order bookOrder bookA list of all open buy and sell orders for an asset, sorted by price. A trade happens when a buy order and a sell order meet., a list of all buy and sell offers. A trade only happens when two offers match. An AMM needs no counterparty, because you trade with the pool itself, at any time. The downside is that the price depends only on the formula and the state of the pool, so small pools can give poor prices.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 18 October 2026.