Detailed Explanation
How It Works
In a traditional exchange, buyers and sellers place orders that match in an order book. In an AMM, trades happen against a liquidity pool. A formula adjusts prices based on the balance of the assets in that pool. As one token is bought, its relative price changes according to the pool’s design.
FAQs
Are AMMs better than order books?
They are different. AMMs are great for decentralized trading, but order books may offer better precision in some markets.
Why do AMMs need liquidity pools?
Because the pools are the source of the assets being traded.
Can AMMs support small tokens?
Yes, which is one reason they became popular in DeFi.
