Order books vs. AMMs: two ways to get a price
One matches you with another trader. The other prices you against a formula and a pool of funds.
At a glance
- An order book matches your trade against someone else's resting order at a price they chose.
- An AMM prices your trade against a formula and a shared pool — there is no counterparty to match, only liquidity to draw from.
- Slippage on an AMM comes from the trade's own size relative to the pool, and is worse in a thin pool.
A traditional order book lists every trader's resting buy and sell orders at their chosen prices. Your market order fills against the best available resting orders on the other side, walking down the book until it's filled. The price you get depends entirely on what other humans and bots were willing to offer at that moment.
An automated market maker works differently. There is no order book and no counterparty to match — instead, a pool of two assets sits behind a pricing formula, most commonly one that keeps the product of the two balances constant. Your trade adds one asset to the pool and removes the other, and the formula itself determines the price as the ratio shifts.
This is why an AMM trade always has slippage relative to the pool's price just before your trade: the act of trading is what moves the price, not a separate participant reacting to it. A larger trade against a smaller pool moves the ratio further and produces worse slippage than the same trade against a deep pool.
Liquidity providers earn a fee on every trade for supplying the pool's funds, in exchange for a real risk called impermanent loss — the pool's holdings shift composition as prices move, and can be worth less than simply holding the two assets separately would have been. Order books carry no equivalent risk for anyone except whoever placed a resting order that didn't fill in time.
| Order book | AMM | |
|---|---|---|
| Price set by | Resting orders from other traders | A formula and the pool's own ratio |
| Counterparty | Another trader's order | The pool itself |
| Slippage caused by | Thin resting depth | Your trade's size relative to the pool |
| Fee paid to | The exchange, sometimes the maker | Liquidity providers in the pool |
Key terms
- AMM
- Automated market maker — a pool priced by a formula rather than matched against other traders' orders.
- Slippage
- The difference between the price quoted before a trade and the price actually received.
- Impermanent loss
- The reduction in a liquidity pool's value relative to simply holding its two assets, caused by price movement.
Frequently asked
Which one gives a better price?
Neither is universally better — an order book usually offers tighter pricing for liquid assets with deep books, while an AMM can offer continuous pricing for thinly traded assets no order book supports.
Can the same token trade on both types at once?
Yes, and frequently does — arbitrage between an order book venue and an AMM pool is one of the most common forms of the mild MEV described elsewhere in this primer.
Do I need to provide liquidity to trade against an AMM?
No — anyone can trade against the pool at any time; providing liquidity is a separate, optional role that earns fees but carries impermanent loss risk.