# AMM What is an Automated Market Maker (AMM)? **Automated Market Maker (AMM)** is a type of decentralized exchange (DEX) protocol that allows users to trade cryptocurrencies directly with a liquidity pool, rather than relying on traditional order books. Instead of matching buyers and sellers, AMMs use smart contracts and mathematical formulas to automatically set prices and execute trades. How Does an AMM Work? 1. **Liquidity Pools**:\ AMMs rely on liquidity pools, which are collections of funds provided by users (called liquidity providers or LPs). These pools contain pairs of tokens (e.g., SEGA/USDC) that traders can swap between. 2. **Pricing Mechanism**:\ AMMs use a mathematical formula to determine the price of assets in the pool. The most common formula is the **Constant Product Market Maker** model (popularized by Uniswap), which follows the equation: x×y=k Here, x and y represent the quantities of two tokens in the pool, and k is a constant. As traders swap one token for another, the ratio of the tokens changes, and so does the price. 3. **No Order Books**:\ Unlike centralized exchanges, AMMs don’t use order books. Instead, trades are executed directly against the liquidity pool, ensuring continuous liquidity and eliminating the need for buyers and sellers to match orders. 4. **Liquidity Providers (LPs)**:\ Users who deposit tokens into the liquidity pool earn fees from trades that occur in the pool. These fees are distributed proportionally to LPs based on their share of the pool 5. Key Benefits of AMMs: * **Decentralization**: AMMs operate on blockchain networks, removing the need for intermediaries. * **Accessibility**: Anyone can become a liquidity provider and earn fees. * **Continuous Liquidity**: Trades can happen 24/7 without relying on market makers or order books. * **Permissionless**: Users can trade and provide liquidity without needing approval from a central authority. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.sega.so/protocol/amm.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.