An automated market maker is a DEX design that prices trades with a formula and a liquidity pool, not an order book. On a traditional exchange, buyers and sellers post prices and a matching engine pairs them. In an AMM, a contract holds reserves of two or more tokens. A formula, typically x multiplied by y equals k, sets the price from the reserve ratio.
When you swap, you change that ratio, so the price moves.
Uniswap popularized this model and it became the base of DeFi trading. Anyone can add liquidity by depositing equal values of both tokens and earn a share of fees. AMMs run 24/7 for any listed pair without a designated market maker. The tradeoff is capital inefficiency and impermanent loss, which hits providers when prices diverge a lot.
Later designs such as Uniswap v3 concentrated liquidity improved how much trading a given dollar of capital can support. When you trade, you swap one token for another, changing the ratio in the pool and thus moving the price. AMMs enable permissionless, 24/7 trading for any token pair without requiring counterparties or market makers. Uniswap popularized x*y=k pools.
Liquidity providers deposit two tokens. Traders swap against the pool instead of an order book.
AMM Liquidity Pool
Constant Product Formula (x * y = k)