An automated market maker (AMM) is a kind of decentralized exchange (DEX) protocol. This protocol is based on a simple mathematical formula to price the assets. The priceS of the assets are determined using an algorithm instead of using a traditional order book.
This formula can be different for each protocol. For instance, Uniswap uses x*y=k. Here x is the amount of one token in the pool of liquidity, and the amount of the other is y. k stands for the fixed constant, which is the bank's total liquidity.
This total liquidity of the pool always means to remain the same. Other AMM will use different formulas. The use of procedures is based on the specific cases they are targeting. The similar thing between all of these formulas is that they determine the prices by using algorithms.
Usually, the traditional market-making works with the firms—this type of market-making uses vast resources and complex strategies. You will be helped by the market makers to get a fair price and tight bid-ask spread. The automated market makers decentralize this process. Now anyone can create a market on the blockchain.
