AMM: the algorithm pricing your DEX trades

Pricing Trades With a Formula

An Automated Market Maker (AMM) is a type of decentralized exchange that uses a mathematical formula to price trades instead of an order book. The formula operates on the reserves of a liquidity pool: when you swap one token for another, the pool's reserves shift and the formula automatically computes the new price. No counterparty needs to be found—the pool always quotes.

Uniswap v2 popularized the constant product formula, which works well for any pair but is inefficient for assets that trade close to each other (like stablecoins or wrapped versions of the same asset). Curve introduced a hybrid curve specialized for stable assets, dramatically reducing slippage on USDC/USDT or stETH/ETH swaps. Uniswap v3 added concentrated liquidity, letting providers focus their capital within a price range and earn more fees on the same deposit.

AMMs are the dominant mechanism behind DEX volume. They are simple, permissionless, and 24/7—anyone can list a pair by seeding a pool, and any wallet can swap without registration. The downsides are impermanent loss for providers, MEV exposure for traders, and pricing inefficiency on long-tail or thinly traded pairs. Aggregators route across multiple AMMs and order books to find the best execution available.