An Automated Market Maker (AMM) is a decentralized exchange mechanism that enables digital asset trading without relying on conventional order books. Instead of matching buyers and sellers directly, AMMs utilize algorithms and smart contracts to enable automated trading and liquidity provision.

AMMs function by utilizing a mathematical formula or algorithm to establish the asset prices within a liquidity pool. Liquidity pools are formed by funds provided by users who contribute their digital assets to enable seamless trading. These pools enable the swapping of one digital asset for another based on the predetermined algorithm.

When a user wants to trade on an AMM, they interact with the liquidity pool by depositing their assets into the pool. The algorithm of the pool dynamically adapts the asset prices according to the asset ratios in the pool. This guarantees that trades can be executed at any moment based on the algorithm-determined current price.