What is Automated Market Maker (AMM)?
In a traditional stock market, buyers and sellers wait for their orders to match in an order book.
An AMM replaces this with a liquidity pool and a math formula (like x * y = k).
Traders trade directly against the pool of tokens at any time with zero delay.
Why It Matters in Web3 & Crypto
AMMs make trading possible for any cryptocurrency token 24/7 without needing a big market maker company to provide buy and sell quotes.
Key Mechanics & Best Practices
- 1Choose an AMM DEX like Uniswap, PancakeSwap, or Raydium.
- 2Enter your trade size and review price impact before swapping.
- 3Earn a portion of trading fees by depositing equal values of two tokens into the pool.
Practical Scenario
A liquidity pool holds 10 ETH and 30,000 USDC ($3,000/ETH spot). Under the constant product formula (x · y = k), purchasing 1 ETH requires depositing ~3,333.33 USDC (~11.1% price impact before fees). The pool now holds 9 ETH and 33,333.33 USDC, raising the next marginal spot price to ~$3,703.70/ETH (+23.5%).
SECURITY & RISK TIP
When trading low-liquidity coins on an AMM, keep trade sizes small to avoid high price impact and slippage.