Automated Market Maker (AMM)

AMM systems gained off after they were initially adopted by Shearson Lehman Brothers and ATD in the early 1990s – prior to their creation, order books were created by people manually initiating trades to boost market liquidity.

This method was responsible for some slippage and lag in market price discovery. Market makers have also been accused of market manipulation. When they were first launched, AMMs eliminated all of the problems presented by human market makers. Such methods are currently being employed in blockchain-based decentralized exchanges.

On AMM-based decentralized exchanges, the traditional order book is replaced by liquidity pools that are pre-funded on-chain for both assets of the trading pair. Other users provide liquidity, and they earn passive income on their deposits by paying trading fees based on the percentage of the liquidity pool that they provide.