AMM: Automated Market Maker
Also known as: AMM, constant product market maker, liquidity pool pricing, DEX market maker
What is it?
An automated market maker is a pricing formula that replaces the order book: instead of matching your buy against someone else's sell, you trade against a pool of two assets whose ratio sets the price. The common design holds the product of the two balances constant. If a pool holds 100 ETH and 300,000 USDC, their product is fixed, so buying ETH out of the pool leaves less ETH and more USDC - and the price of the next ETH rises automatically. Nobody quotes that price; it falls out of the arithmetic.
| Central limit order book | Automated market maker | |
|---|---|---|
| Who sets the price | Traders posting bids and offers | A formula over the pool's two balances |
| Who you trade against | Another trader's resting order | The pool itself - no counterparty needed |
| Where liquidity comes from | Market makers quoting both sides | Passive depositors earning a fee share |
| What moves your fill | How deep the book is at your size | Your size relative to the pool |
| $100k order in a $600k pool | Fills near the quote on a deep book | Walks price several % against you |
Liquidity providers deposit both assets, earn a share of the trading fee, and take the other side of every trade passively. The consequence you feel as a trader is that your own trade moves the price, and by how much depends entirely on your size relative to the pool. In a $600,000 pool a $1,000 swap moves price fractionally, while a $100,000 swap moves it several per cent against you before it even completes - price impact that has nothing to do with market direction. This is why large orders are split, why slippage tolerance is set explicitly on decentralised venues, and why a deep order book usually beats an AMM for size.
Check the pool depth before the trade, not after. See /risk-warning.
Why it matters: Price comes from a formula over pool balances, so your own order size moves the price against you - the smaller the pool, the worse the fill.
Constant product pool: token A balance x token B balance = k
Price impact scales with your size against the pool, so an order that fills cleanly on a deep book can cost several per cent on a shallow pool.
Real-world example
In a pool holding 100 ETH and 300,000 USDC, a $1,000 swap barely moves the price, while a $100,000 swap walks it several per cent higher before the trade completes.
How SignalBots handles it
SignalBots crypto signals are level-based, so on a decentralised venue you can check pool depth and set slippage tolerance before executing rather than discovering the price impact on fill. See /risk-warning.
Pro tip
Compare your intended order size against the pool's total liquidity before trading - above roughly 1% of the pool, split the order or use a deeper venue.
Common pitfalls
Setting a wide slippage tolerance to force a large swap through, which accepts a much worse fill and exposes the trade to being front-run.
Frequently asked questions
How does an AMM set a price with no order book?
From the ratio of the two assets in the pool. A formula such as constant product fixes the relationship between the balances, so every trade that changes those balances changes the quoted price automatically.
Why did my swap fill worse than the quoted price?
Because your own trade moved the pool. The quote reflects the price before your order; a larger order walks along the curve, and the average price you pay is worse than the price you saw.
What is impermanent loss?
It is the shortfall a liquidity provider sees versus simply holding both assets, caused by the pool rebalancing as prices move. Fees may offset it, but it is a real risk of providing liquidity and your capital is at risk. See /risk-warning.
Is an AMM better or worse than an order book?
It is better at always being available and needing no counterparty at that moment; it is worse for large orders, because price impact grows with size against a fixed pool. Deep order books generally give better fills for size.
Why do bots trade against AMMs so much?
Because the pricing is deterministic and public, so any divergence from other venues is an arbitrage that can be calculated exactly. Those arbitrage trades are what keeps pool prices near the wider market.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
