An automated market maker (AMM) is a set of smart contracts that lets traders swap against token reserves in a liquidity pool, with prices determined by the pool’s rules rather than a traditional order book. Different AMMs use different formulas: Uniswap v2’s constant-product model is one well-known design, while stable-asset pools and concentrated-liquidity systems work differently. “AMM” describes a broad family of mechanisms, not one universal formula.
How an AMM prices a swap
In a constant-product pool such as Uniswap v2, the reserves of two assets are often represented as x × y = k. A trader adds one asset and removes the other; the reserve ratio changes, which changes the quoted price. A larger trade relative to the pool’s available depth generally moves the execution price more. Fees and the exact contract rules also affect the result.
Price impact is the movement caused by a trade’s size against pool liquidity. Slippage describes how the execution price differs from the expected price while a transaction is pending, including changes caused by other trades. The two are related but not identical.
Liquidity providers and their risks
Liquidity providers deposit assets according to a pool’s design and may earn a share of trading fees. In a simple two-asset pool, trades change the mix of assets the provider holds. If the relative prices move, the provider’s position can be worth less than simply holding the original assets; this comparison is called impermanent loss. It is relative performance, not a guarantee of an absolute loss, and the name does not mean the difference must reverse. Fees may offset it, but do not guarantee a profit.
Concentrated-liquidity pools let providers choose a price range. This can make capital more active within that range, but when the market moves outside it, the position can stop earning swap fees and may hold mostly one asset. Providers also face smart-contract, token, depeg, liquidity, and transaction-ordering risks.
Why AMM designs differ
Constant-product pools are suited to a broad range of token pairs. StableSwap curves are designed for assets expected to trade near the same value, such as certain stablecoins or wrapped versions of one asset. Concentrated-liquidity designs let providers select price bands. These choices change how a pool handles trade size, liquidity, and price movement; an AMM does not guarantee a fair price, deep liquidity, or low fees.
Social Media Sentiment
A popular r/CryptoCurrency guide to AMMs and liquidity pools drew discussion around how these systems differ from order books and why impermanent loss matters to liquidity providers. The thread reflects educational interest and user questions, not representative sentiment about every AMM or a current assessment of any pool. Read the Reddit discussion.
Last updated: 2026-10
Related Terms
See Also
- What Is MEV — And Why Every Ethereum Transaction Is a Game
- Are Layer 2 Networks Actually Decentralized?
- Why Algorithmic Stablecoins Keep Failing (And Why People Keep Trying Anyway)
- Swap crypto with ChangeNOW
Sources
- Uniswap Developers — How Uniswap Works — Explains pool reserves, the constant-product model, and how trade size affects price impact across Uniswap versions.
- Uniswap Developers — Uniswap v2 Swaps — Describes the v2 pool mechanism, reserve accounting, and constant-product swap constraint.
- Curve Knowledge Hub — Understanding StableSwap — Explains why Curve’s StableSwap curve is designed for similarly priced assets and differs from constant-product pools.