Automated Market Makers (AMMs) are a type of decentralized exchange protocol that enables the automatic trading of digital assets without relying on traditional order books. Instead, AMMs utilize smart contracts to create liquidity pools where users can trade their assets directly against the pool. The [MEV.wiki](https://mev.wiki/) page provides detailed information about AMMs and their functioning: AMMs work based on mathematical formulas known as bonding curves or constant product market makers. These formulas determine the price of an asset within a liquidity pool based on its relative supply and demand. AMMs allow anyone to become a liquidity provider by depositing an equal value of two different tokens into a pool. In return for providing liquidity, users receive "liquidity provider (LP) tokens" representing their share in the pool's reserves. These LP tokens can be redeemed later for their proportional share of the pooled assets along with any fees generated from trades. One popular example of an AMM is [Uniswap](https://uniswap.org/), which operates on Ethereum and has gained significant traction in DeFi applications. Uniswap utilizes a simple constant product formula called x*y=k, where x represents one token's quantity, y represents another token's quantity, and k remains constant throughout trades.* Check out the [[Uniswap v2 Core.pdf|Uniwswap whitepaper]] to read more. AMMs have several advantages over traditional order book exchanges. They provide continuous liquidity regardless of trading volume since they rely on predefined formulas rather than matching buyers and sellers directly. Additionally, they enable permissionless participation without requiring intermediaries or centralized control. However, it is important to note that AMMs also face certain challenges such as impermanent loss—a temporary reduction in asset value due to changes in relative prices—and susceptibility to front-running attacks by miners seeking MEV opportunities. > Sources: The [Miner Extractable Value Wiki](https://mev.wiki/), maintained & sponsored by [Automata Network](https://ata.network), which references: > [[Uniswap v2 Core.pdf|Uniwswap whitepaper]] > [[Balance Finance whitepaper.pdf]] > [[Curve Finance - Crypto Pools Whitepaper.pdf]]