What is AMM (Automated Market Maker)?
A protocol that uses mathematical formulas and liquidity pools to facilitate token swaps without traditional order books or intermediaries.
An Automated Market Maker (AMM) is the mechanism that powers most decentralized exchanges. Instead of matching buyers and sellers through an order book, AMMs use liquidity pools and mathematical formulas to determine prices.
How AMMs Work
- •Liquidity providers deposit pairs of tokens into a pool (e.g., SOL + USDC)
- •The AMM uses a formula (usually x * y = k) to set prices
- •When you swap, you trade against the pool, not another person
- •The price adjusts based on the ratio of tokens in the pool
AMMs on Solana
Major Solana AMMs include:
- •Raydium — Concentrated liquidity with order book integration
- •Orca — Concentrated liquidity pools (Whirlpools)
- •Meteora — Dynamic fee pools
AMMs and Copy Trading
When SOL Wallet Shadow copies a whale trade, it interacts with AMMs through Jupiter. Jupiter finds the AMM (or combination of AMMs) that offers the best price for your specific trade size.
Understanding AMMs helps you understand why slippage happens — when your trade is large relative to the pool, it shifts the price curve more, resulting in a less favorable price.