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AMMs (Automated market makers) are part of the DeFi (decentralized finance) ecosystem. AMMs allow digital assets to be traded in a permission-less and automatic way by using liquidity pools rather than the traditional market of buyers and sellers. AMM users will supply liquidity pools with tokens, value will be determined by a constant mathematical formula. Liquidity pools are an essential instrument in the DeFi ecosystem and can be optimized for multiple purposes.
A liquidity pool can be thought of as a pool of cryptocurrency assets locked within a smart contract which can be used for DeFI leveraging AMMs. In traditional finance (Centralized Finance or CeFi), liquidity is provided by a central organization, such as a bank or a stock exchange.