AMM Explained: How Automated Market Makers Power DeFi Trading

When you swap tokens on a decentralized exchange like AMM, an Automated Market Maker is a smart contract that replaces traditional order books with mathematical formulas to set prices. Also known as liquidity-based trading protocol, it lets you trade crypto without waiting for someone else to buy or sell—because the pool itself is always ready. Unlike old-school exchanges where buyers and sellers match orders, AMMs use fixed formulas, usually based on the product of two token amounts staying constant. That’s why you see prices shift slightly every time you trade—because the pool’s balance changes.

Behind every AMM is a liquidity pool, a reserve of two tokens locked in a smart contract, provided by users called liquidity providers. These providers earn fees from every trade that happens in the pool, but they also risk losing money if the price of one token swings wildly—that’s called impermanent loss. You’ll see this play out in posts about failed airdrops like ACMD and SMCW, where token prices crashed after liquidity vanished. And when liquidity drops, trading volume falls too, which is exactly what happened after crypto restrictions hit major markets.

AMMs don’t work the same everywhere. PancakeSwap v3 on Arbitrum, a popular DeFi platform using concentrated liquidity to maximize capital efficiency. lets traders get better rates with lower fees than older versions. Meanwhile, platforms like Uniswap use different models, and some DeFi protocols get hacked because their AMM logic has flaws—like in flash loan attacks where bad actors manipulate prices in a single transaction. That’s why security audits and TWAP oracles are now common fixes.

AMMs are the reason you can trade obscure tokens without a centralized exchange. But they’re also why so many tokens die quietly—no liquidity, no trading volume, no price discovery. If you’ve ever wondered why a token you bought suddenly has zero buyers, it’s likely because its AMM pool was drained or abandoned. The same tools that make DeFi open and permissionless also make it fragile when incentives misalign.

What you’ll find below are real stories of AMMs in action: how they succeed, how they fail, and how users get burned when they assume the system is foolproof. From low-fee swaps on Arbitrum to dead tokens with empty pools, this collection shows the raw mechanics behind DeFi trading—not the hype, just the code, the capital, and the consequences.