AMM (Automated Market Maker) is the core trading mechanism used by decentralized exchanges (DEXs). Instead of relying on a traditional order book, AMMs use “liquidity pools” to automatically match trades and determine prices.
In other words, you’re not trading with another user — you’re trading with a smart contract-powered liquidity pool.
AMMs use a liquidity pool containing reserves of two or more tokens, provided by users. These tokens are priced using mathematical formulas — the most common being Uniswap’s constant product model: x * y = k.
For example, in an ETH/USDC pool:
When someone swaps ETH for USDC, ETH increases and USDC decreases, causing the ETH price to rise
Conversely, swapping USDC for ETH decreases ETH in the pool, causing its price to fall
All trades are priced and executed automatically via algorithm, with no human intervention
âś… No order book required; no reliance on buyer-seller matching
✅ Every trade executes instantly — no need to wait for counterparties
âś… Anyone can provide liquidity and earn transaction fees
❌ Subject to slippage, especially in low-liquidity pools
❌ Exposes liquidity providers to impermanent loss risks
Order books are the trading model used by centralized exchanges (like Binance and Coinbase). The system maintains a live list of buy/sell orders, and users must wait for their orders to be matched.
Users can set:
Buy price + quantity
Sell price + quantity
The system executes trades once opposing orders match
|
Comparison |
AMM (Automated Market Maker) |
Order Book Trading |
|---|---|---|
|
Matching Method |
Smart contract and liquidity pool |
User-to-user matching via exchange system |
|
Counterparty |
Smart contract (liquidity pool) |
Another user |
|
Pricing Mechanism |
Algorithmic formula (e.g. x*y=k) |
Real-time prices driven by market demand |
|
Slippage |
Present; affected by liquidity |
Lower unless in high volatility situations |
|
Market Depth |
Based on liquidity provided by users |
Depends on number and density of orders |
|
User Roles |
Traders and liquidity providers |
Buyers and sellers only |
|
Best Use Case |
DeFi, DEXs, on-chain trading |
CEXs, fast centralized matching systems |
đź“Ś Example
On Uniswap (AMM model), if you swap 100 USDC for ETH, the system calculates the price instantly based on the ETH/USDC pool ratio and completes the trade.
On Binance (order book model), you place a 100 USDC buy order for ETH. You must wait for a seller’s order to match before it executes.
If you want to experience decentralized, trustless trading, AMMs like Uniswap and Jupiter are ideal.
If you need more precise pricing and lower slippage for frequent trades, order book models like Binance or OKX are better suited.
Many users combine both — buying coins on CEXs and then using them on-chain via AMMs or participating in DeFi liquidity pools.