Liquidity providers deposit pairs of assets into a pool, and traders swap against it, with prices set automatically by the pool's balances. In return, providers earn a share of the trading fees.
AMMs made permissionless trading possible, but providing liquidity carries its own risks, including impermanent loss when the pooled assets move apart in price.
DeFi Basics and Risks
Key takeaways
- An AMM prices trades from pooled assets and a formula, not an order book.
- Liquidity providers earn fees but take on risk.
- It made permissionless, on-chain trading possible.
Automated Market Maker (AMM) — preguntas frecuentes
What is impermanent loss?
A loss liquidity providers can suffer when the two pooled assets diverge in price, leaving them worse off than simply holding.
How does an AMM set prices?
Automatically, from the ratio of assets in the pool, so each trade nudges the price along a set formula.
This definition is educational and not financial advice. Crypto is volatile and high-risk — always do your own research.
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