Automated Market Makers (AMMs) are a type of decentralized exchange (DEX) that uses a mathematical algorithm to determine the price of assets.
Unlike traditional exchanges, AMMs do not rely on order books or matching buyers with sellers, but rather rely on a pricing model that determines the price of an asset based on the supply and demand in the pool.
In AMMs, liquidity providers (LPs) deposit two different assets into a liquidity pool, and in return, they receive a proportional amount of the pool’s governance token, which represents their share of the liquidity pool. The pricing algorithm used in AMMs determines the price of the asset based on the ratio of the two assets in the pool, and as more traders buy and sell, the algorithm adjusts the ratio to maintain a stable price.
