What is an automated market maker? How DEXs set prices without an order book
By SendPay Business · · 2 min read
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An automated market maker (AMM) is a type of decentralised exchange (DEX) that lets people swap crypto tokens against a shared pool of funds instead of matching buyers with sellers on an order book. Uniswap, launched on Ethereum in 2018, made the idea popular.
How it works
- Liquidity providers deposit two tokens into a pool, such as ETH and a stablecoin.
- Traders swap one token for the other directly with the pool.
- A formula sets the price. The best known keeps the two token amounts multiplied together constant (x × y = k).
- Each swap pays a small fee, which goes to the liquidity providers.
Why prices move
When someone buys a token from the pool, there's less of it left, so the formula makes it more expensive. Big trades in small pools move the price a lot, which is called slippage. Arbitrage traders then bring the pool price back in line with other markets.
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Risks
Smart contracts can have bugs or be hacked, liquidity providers can suffer impermanent loss, and some tokens in pools are scams. DeFi isn't covered by the FSCS or by most consumer protections.
Where SendPay fits
SendPay doesn't offer DeFi or liquidity pools. SendPay platforms let your customers buy, sell and hold crypto under your own brand, with assets held by regulated partners and a trading fee you set.
How it works
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Questions people ask
How does a swap in an AMM pool get priced?
Enter the pool balances and your swap into the free calculator.
AMM swap calculator →What is impermanent loss?
See how a 50/50 pool compares with holding the two tokens.
Impermanent loss calculator →Read next
Spotted a mistake or something out of date? and we'll fix it. How our guides are made
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. Other companies named in this guide are reference points only and are not affiliated with SendPay Business.