What is an Automated Market Maker (AMM)? Unlocking the core engine of DeFi liquidity

In the world of decentralized finance (DeFi), Automated Market Makers (Automated Market Maker, AMM) play a crucial role. They function like a “trading engine” that requires no human intervention, completely transforming the way users exchange cryptocurrencies. According to data, from 2017 to 2023, the average number of user accounts in DeFi skyrocketed from just 189 to over 6.6 million, with the AMM model being one of the core drivers of this growth. This article will comprehensively analyze AMM from principles, applications, risks to future trends, and provide you with the latest price movements of mainstream AMM protocol tokens on Gate.

What exactly is AMM? Say goodbye to traditional order books

Before understanding AMM, let’s first look at how traditional centralized exchanges (CEX) operate. They rely on order books, with professional market makers providing buy and sell quotes, earning the bid-ask spread (Bid-Ask Spread).

AMM, on the other hand, overturns this model. It is an algorithmic protocol running on the blockchain that automatically executes trades via smart contracts, completely removing intermediaries and order books. Its core is a liquidity pool, where anyone can deposit their cryptocurrencies to become liquidity providers and offer instant exchange services to all traders.

How does AMM work? An in-depth look at the “Constant Product Formula”

The most common AMM model is the “Constant Product Market Maker,” pioneered by Uniswap. Its core formula is: x * y = k.

• x and y represent the quantities of two assets in the liquidity pool.
• k is a constant value.

This formula ensures that regardless of how trades occur, the product of the two assets’ quantities remains unchanged. When someone uses asset A to buy asset B, the amount of A in the pool increases, while B decreases, causing B’s price to rise. This process is fully calculated and executed automatically by the algorithm, enabling real-time, continuous market pricing.

For example: Suppose an ETH/USDC liquidity pool initially has 50 ETH and 100,000 USDC, with k = 5,000,000. When a trader wants to buy 1 ETH using USDC, the algorithm calculates that they need to pay about 2,040.816 USDC. After the trade, the ETH price in the pool rises from $2,000 to about $2,040.816. This process is the source of slippage—the larger the trade volume relative to the pool, the greater the price slippage.

Mainstream AMM protocols and token prices as of January 6, 2026

Currently, there are several successful AMM protocols, each with governance tokens. Here are three representative protocols and their latest prices on Gate (data as of January 6, 2026):

Advantages and potential risks of AMM

Advantages

1. Permissionless, anyone can participate: Anyone can become a liquidity provider without approval, truly achieving open and inclusive finance.
2. Provides liquidity for long-tail assets: Emerging projects can easily create trading pairs without waiting for centralized exchanges, greatly promoting innovation.
3. Asset self-custody: Trading occurs entirely in users’ wallets, reducing counterparty risk.
4. Earn passive income: Liquidity providers can earn fees from each trade in the pool.

Risks and challenges

1. Impermanent loss: The main risk faced by liquidity providers. When the market prices of the two assets in the pool diverge significantly, LPs may suffer value loss compared to simply holding the assets.
2. Smart contract risk: Code vulnerabilities could be exploited by hackers, leading to fund losses.
3. Regulatory uncertainty: Global regulatory frameworks for DeFi and AMM are still evolving, and future policies may impact the ecosystem.

How to participate safely in AMM?

If you want to try becoming a liquidity provider, follow these steps:

1. Learn and research: Fully understand impermanent loss and project risks.
2. Choose reliable protocols: Prioritize well-established, audited, high-liquidity mainstream protocols (like the ones above).
3. Prepare funds: Usually, you need to provide a pair of assets in a 50/50 ratio.
4. Acquire tokens on platforms like Gate: You can buy the required tokens on secure and reputable exchanges like Gate.
5. Connect your wallet and inject liquidity: Use the project’s official website, connect with wallets like MetaMask, and deposit assets into the chosen pool.
6. Manage your position: Regularly monitor the pool and adjust your liquidity based on market changes.

Future outlook for AMM

AMM is still evolving rapidly. In the future, we may see:

• More efficient algorithms: such as concentrated liquidity (Uniswap V3), reducing slippage and improving capital efficiency.
• Multi-chain and cross-chain expansion: protocols will deploy on more blockchains and share liquidity via cross-chain technology.
• Deeper integration with derivatives and lending: AMM liquidity will be more deeply embedded into complex DeFi ecosystems.

Explore the AMM ecosystem on Gate

Automated Market Makers are the infrastructure of the DeFi revolution, democratizing and automating liquidity creation. Whether you want to exchange tokens or earn from providing liquidity, understanding AMM is a crucial step.

As a leading cryptocurrency exchange, Gate offers you a convenient gateway. You can easily acquire mainstream AMM tokens like UNI, CAKE, BAL on Gate and safely participate in the thriving DeFi ecosystem. Visit Gate now and start your decentralized finance journey.