What Is an AMM? Automated Market Maker Meaning in Crypto
AMM: An AMM (automated market maker) is a smart contract that prices trades with a formula over a liquidity pool, so you trade against the pool instead of against another buyer or seller.
Key takeaways
- An AMM replaces the order book with a liquidity pool and a pricing formula; you always trade against the pool.
- The most common formula is the constant product x*y=k: when you buy one token, its price rises as the pool runs low on it.
- Small pools mean big price impact: a 10 SOL buy into a pool with 100 SOL gets about 9% fewer tokens than the starting price suggests.
An AMM, or automated market maker, is a smart contract that sets prices with a formula instead of matching buyers and sellers. You trade against a pool of two tokens. Chainlink explains that people who deposit tokens into the pool are liquidity providers and earn a share of the fees.
How it works
The most common design is the constant product formula, x*y=k. x and y are the amounts of the two tokens in the pool. After each trade, their product stays the same (before fees). So when you remove one token, you must add more of the other, and the price moves.
Example: a memecoin pool holds 100 SOL and 1,000,000 TOKEN, so k = 100,000,000. You buy with 10 SOL. The pool now has 110 SOL, so it must keep about 909,091 TOKEN. You get about 90,909 TOKEN, not 100,000. That gap is price impact, and it grows as the pool gets smaller.
Why it matters for traders
On memecoins, pools are often small, so slippage is a real cost. Set a slippage limit and size your trade to the pool. Many Solana memecoins start on a bonding curve and move to an AMM pool at graduation; see our pump.fun guide. For the wider context, read what a DEX is.