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Automated market makers incentivize users to become liquidity providers in exchange for a share of transaction fees and free tokens.

When Uniswap launched in 2018, it became the first decentralized platform to successfully utilize an automated market maker system.

An automated market maker (AMM) is the underlying protocol that powers all decentralized exchanges (DEXs). Simply put, they are autonomous trading mechanisms that eliminate the need for centralized exchanges and related market-making techniques. In this guide, we will explore how automated market makers work.

But first, let us take a look at what are market makers.

What is a market maker?

A centralized exchange oversees the operations of traders and provides an automated system that ensures trading orders are matched accordingly. In other words, when Trader A decides to buy 1 BTC (-1.5%) at $34,000, the exchange ensures that it finds a Trader B that is willing to sell 1 BTC at Trader A’s preferred exchange rate. As such, the centralized exchange is more or less the middleman between Trader A and Trader B. Its job is to make the process as seamless as possible and match users’ buy and sell orders in record time.
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