AMM Explained: What Automated Market Makers Are and How They Power Decentralized Trading

When you trade crypto without a middleman, you're likely using an AMM, an Automated Market Maker that sets prices using math instead of order books. Also known as liquidity-based trading protocol, it’s the engine behind most decentralized exchanges today. Unlike traditional exchanges where buyers and sellers match orders, AMMs use pools of tokens locked in smart contracts to let you trade instantly. No waiting. No counterparty. Just code.

These systems rely on liquidity pools, reserves of two tokens paired together that enable continuous trading. For example, if a pool holds 100 ETH and 200,000 USDC, the price of ETH is automatically set at 2,000 USDC. When you buy ETH, you take some out of the pool, and the algorithm adjusts the price upward to keep the ratio balanced. This is how decentralized exchange, a platform that lets users trade crypto directly from their wallets without depositing funds platforms like Uniswap or Karura Swap stay operational 24/7. But this system isn’t perfect—large trades cause slippage, and if a pool is too small, prices can swing wildly. That’s why some AMMs now use multi-pool models or insurance layers to reduce risk.

AMMs are also tied to DeFi, a system of financial applications built on blockchain that operate without banks or brokers. They’re the backbone of lending, staking, and yield farming because they provide the trading infrastructure. But not all AMMs are equal. Some charge high fees, others have weak security, and a few are just fronts for rug pulls. The posts below cut through the noise. You’ll find real reviews of exchanges like Karura Swap and BarterDEX that use AMMs, breakdowns of how liquidity pools affect your trades, and warnings about fake DeFi platforms pretending to offer better rates. Whether you’re swapping tokens on Base chain or exploring cross-chain swaps, understanding how AMMs work means you won’t get blindsided by hidden costs or scams.