Definition
An automated market maker is a trading mechanism that uses programmed rules and pooled assets to quote exchanges, rather than matching every trade against another user's standing order. A common constant-product design relates two token reserves through a mathematical invariant, so buying one asset changes the pool's balance and the price available for subsequent trades. Other designs use different curves, concentrated liquidity, or additional parameters. Liquidity providers supply the assets and may receive trading fees, but their returns depend on market movements, trading activity, costs, and the protocol's rules. Large trades relative to available liquidity can produce substantial price impact. Arbitrage trades help connect pool prices to prices elsewhere, without guaranteeing identical quotes at every moment. An AMM removes some operational roles of a traditional exchange, but it does not eliminate smart contract vulnerabilities, token-specific restrictions, manipulation risks, or losses associated with providing liquidity.
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