AMM Explained: What Automated Market Makers Are and Why They Matter in Crypto

When you trade crypto on a decentralized exchange like Uniswap or SushiSwap, you’re not buying from another person—you’re trading against a AMM, an automated market maker that uses algorithms and pooled funds to set prices without human traders. Also known as algorithmic market maker, it’s the engine behind nearly every DeFi trade today. Unlike old-school exchanges that match buyers and sellers, AMMs use math—specifically, constant product formulas—to keep trading flowing 24/7. This means you can swap tokens anytime, even if no one else is trading them.

AMMs rely on liquidity pools, reserves of two tokens locked in a smart contract that enable instant swaps. For example, if you want to trade ETH for USDC, the AMM pulls from a pool holding both. The more money in the pool, the smoother and cheaper your trade. That’s why people stake their tokens in these pools—they earn fees every time someone trades against them. But there’s a catch: if the price of one token swings wildly, you can lose value. This is called impermanent loss, a temporary drop in value that happens when token prices in a liquidity pool diverge. It’s not a real loss until you pull out, but it’s something every DeFi user needs to understand.

AMMs aren’t just for swapping tokens—they’re the foundation for staking, yield farming, and even complex DeFi strategies. Platforms like Curve use specialized AMMs optimized for stablecoins, while others like Balancer let you create custom pools with multiple tokens. The rise of DEX, decentralized exchanges that run entirely on blockchain without central control has made AMMs essential. You can’t talk about DeFi without talking about AMMs. They removed the middleman, but they didn’t remove the risk.

The posts below dive into real-world examples: from Curve DAO Token (CRV), which rewards liquidity providers, to URSWAP and Chainflip, which use AMM logic for cross-chain swaps. You’ll also see how low-liquidity meme coins like MOON or BABYKEKIUS exploit AMM mechanics to create fake volume and lure in unsuspecting traders. Some AMMs are powerful tools. Others? They’re just traps dressed up as innovation. Here’s what you need to know to tell the difference.