A protocol that runs on decentralized exchanges (DEX) that replaces the order book found on traditional exchanges with liquidity pools — shared pots of tokens locked in a smart contract. AMMs use algorithmic pricing formulas to determine token prices based on the ratio of assets in each pool. This innovation has been fundamental to the growth of DeFi by enabling permissionless, 24/7 trading without intermediaries.
Example
“The AMM automatically adjusted the token price as traders swapped in and out of the liquidity pool.”