Automated Market Making (AMM): How It Works, Designs, Risks, and the Future
Introduction Automated Market Makers (AMMs) are the liquidity engines powering most decentralized exchanges (DEXs). Instead of relying on traditional order books and human market makers, AMMs use deterministic formulas—called bonding curves—to continuously quote buy and sell prices for assets. This design unlocks 24/7 liquidity, permissionless market creation, and composability across decentralized finance (DeFi). Yet AMMs also introduce new mechanics and risks: slippage, impermanent loss, MEV (maximal extractable value), and complex design trade-offs. ...