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What is an Automated Market Maker (AMM) and how does it work?

Decentralized exchanges have grown massively since 2019, thanks in large part to a core technology called automated market makers (AMMs). This tool has made trading digital assets easier and in an automatic, trustless (sans third parties) way.

In a nutshell, an AMM allows trading crypto and other digital assets without relying on external data.

This article explores what AMMs are and how they work.

What is an automated market maker?

AMMs seek to decentralize and automate market making, which helps to make crypto and the DeFi ecosystem more sustainable. The origins of AMMs can be traced back to Ethereum founder Vitalik Buterin’s blog post about on-chain market makers. But it was only pioneered in the production by Uniswap in 2018.

Today, AMMs are the underlying protocol that powers all decentralized exchanges, allowing users to exchange cryptocurrencies directly and without an intermediary. In simple terms, AMMs are autonomous trading mechanisms that replace traditional market-making techniques that rely on the interaction between buyers and sellers.