An Automated Market Maker (AMM) is a type of Decentralised Exchange (DEX) protocol running Smart Contracts, that pools liquidity from users, known as Liquidity Providers (LP’s), and allows this liquidity to be traded automatically through a pricing algorithm in a permission-less manner. LP’s are able to earn a passive income for their deposited funds through trading fees taking place in their pool.
This can be seen as a “peer-to-contract” trade, while traditional exchanges on the other hand, use an order book to facilitate trades, which reflects “peer-to-peer” transactions.
Most notable Automated Market Makers are Pancakeswap on the Binance Smart Chain (BSC), and Sushiswap and Uniswap both operating on the Ethereum network.
