Automated Market Maker
A smart contract that prices trades from a formula and a pool of assets, so no other trader needs to be on the other side.
Depositors place two or more assets into a pool, and the contract quotes a price derived from the balances it currently holds. Each swap pays a fee, a small percentage of the trade, which accrues to the depositors in proportion to their share of the pool. Because the quoted price depends only on the pool balances, it drifts away from prices on larger venues until arbitrage traders swap in the correcting direction and restore alignment. An automated market maker differs from a human market maker in that it quotes mechanically and continuously, forms no view on value, and cannot withdraw its quotes during stress.
In practice
In a constant product pool, taking token A out raises the price of the next unit of token A automatically, with no order matching and no human quoting.
The common misunderstanding
An automated market maker does not discover price on its own; its quote follows the pool ratio, which arbitrage traders pull toward prices set on deeper markets.
The figure this maps to
The dollar value of tokens swapped through decentralized exchange contracts over the last 24 hours.
Limits: Wash trading is the central defect: wherever a venue, a chain or a prospective airdrop rewards volume, participants trade against themselves and the contracts record it as genuine, with no surveillance function able to exclude it. Aggregators and routers create double counting when a single order…