AMM Algorithms: How Automated Market Makers Power Decentralized Trading

When you trade crypto on Uniswap, SushiSwap, or Curve, you’re not buying from another person—you’re interacting with an AMM algorithm, a mathematical rule set that automatically sets prices based on token supply in a liquidity pool. Also known as automated market makers, these algorithms replace traditional order books with code that keeps trading alive even when no buyers or sellers are actively looking. Unlike centralized exchanges that match orders, AMMs use formulas like the constant product formula (x * y = k) to calculate prices in real time. This means every trade changes the ratio of tokens in the pool, and the price adjusts automatically. It’s simple, transparent, and works 24/7—but it’s not magic. These algorithms are why you see slippage on small trades and why big swaps can tank a token’s price.

AMM algorithms rely on liquidity pools, reserves of two tokens locked in smart contracts that enable trading without intermediaries. Anyone can add funds to these pools and earn fees, but they also take on impermanent loss, the risk that the value of deposited tokens drops relative to holding them outside the pool due to price swings. This isn’t theoretical—it’s happened to thousands of users when meme coins spiked or crashed overnight. The more volatile the pair, the higher the risk. Meanwhile, newer AMMs like Curve use weighted formulas for stablecoins, reducing slippage but limiting flexibility. These variations show AMMs aren’t one-size-fits-all; they’re tools shaped by use case.

Behind every DeFi trade you make, there’s an AMM algorithm doing the math. They enable access to tokens with no listing on major exchanges, let small investors participate in early projects, and keep markets running even when no one is watching. But they also create blind spots: no one is managing the pool, no one is adjusting spreads, and no one is stopping a rug pull. That’s why the posts below dive into real examples—like how low-liquidity tokens like PRZS or KIT get crushed by AMM dynamics, why fake exchanges like MoonDex exploit these systems, and how airdrops like CHY or APIS try to game liquidity incentives. You’ll see how AMM algorithms aren’t just technical details—they’re the engine, the risk, and the trap in today’s decentralized markets.