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An automated market maker (AMM) is a protocol that prices trades using a formula applied to assets in a liquidity pool, rather than matching buyers and sellers through an order book. Traders swap against the pool; liquidity providers supply its assets and may earn a share of trading fees.
How an automated market maker works
An order-book exchange matches buy and sell orders. An AMM instead uses assets held in a pool and a pricing rule to determine the terms of a swap. A trader exchanges one pool asset for another, and the pool’s balances change as a result. Ethereum.org’s glossary describes the defining feature as pricing from a formula over pool assets rather than matching buyers and sellers in an order book.
The pool needs liquidity: assets available for traders to swap. Liquidity providers (LPs) contribute those assets and may receive a share of trading fees. The exact formula, pool design, fee arrangements, and risks depend on the protocol; “AMM” describes a broad category, not one universal set of mechanics.
Uniswap v2 as a concrete example
Uniswap is one example of an AMM. Ethereum.org describes it as an automated liquidity protocol powered by a constant-product formula. In the Uniswap v2 walkthrough, an LP supplies two ERC-20 tokens to a pair pool and receives liquidity tokens representing a share of that pool. A trader sends one token into the pool and receives the other; the relative reserves help determine the exchange rate. Ethereum.org’s Uniswap overview and its Uniswap v2 contract walkthrough explain this example.
The walkthrough, published in 2021, reports a 0.30% fee for Uniswap v2. That is a version-specific figure from that tutorial, not a general AMM fee or confirmation of current settings across pools and deployments.
What liquidity providers should understand about risk
Providing liquidity is not the same as simply holding the deposited tokens. If the prices of pooled assets diverge, an LP may end up with less value than they would have had by holding those assets instead. Ethereum.org calls this relative shortfall impermanent loss; it can shrink if prices return to their original ratio, and it is realized when the LP withdraws. Ethereum.org’s glossary definition describes the comparison.
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Impermanent loss is a comparison with holding, not proof that every LP loses money overall. Fees earned, asset-price movements, and the timing and conditions of withdrawal all affect the outcome. The sources cited here do not quantify how those factors balance out, so a particular pool’s past or expected result cannot be inferred from the definition alone.
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Why AMM does not name one specific design
AMMs share the broad idea of formula-based trading against liquidity pools, but that does not mean they all use Uniswap v2’s constant-product rule, two-token pool structure, or fee. Ethereum.org also lists other pool-based protocols, including Balancer and Curve, illustrating that the ecosystem includes distinct designs. Its Ethereum apps directory includes related-protocol descriptions, but those short descriptions are not enough to establish a detailed technical comparison.
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To understand a particular AMM or pool, check its current documentation for the pricing rule, pool composition, fee and applicable version, and the risks to LP outcomes. These details can vary by protocol, pool, and deployment.
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