AMM's are a category of decentralized, non-custodial exchanges that are also autonomous. Basically this means there is no incorporated or any financial intermediary needed to set them up, and no gatekeeper needed to set them up, and no custodian of funds that are used to trade on them.
In this type of exchange system, order books and market makers are replaced by liquidity pools, where individuals put up two assets (for example a liquid asset like Ethereum and a less liquid asset that they wish to have liquidity in). This process automatically spawns a smart contract from a smart contract factory, which has all the functions for maintaining that liquidity pool in perpetuity. The smart contract has no administrator and it allows other market participants to trade in that asset. The additional beauty is that the other market participants do not even need "Ethereum" the liquid side of the trading pair in order to buy the asset, as the smart contract factory will route whichever asset the trader owners between liquidity pools. For example, if they had Tether, the smart contract factory will find the Tether/Ethereum liquidity pool, and the Ethereum/NewToken liquidity pool and exchange it at the best price.
Also anybody else can add extra liquidity to the liquidity pool.
All liquidity pool providers earn trading fees from people that buy and sell. Turning them all into market makers.
The final point is that the market decided that these trading fees are not a good enough incentive to add liquidity to liquidity pools, so it is important to know that all liquidity pool providers actually receive a bearer token representing their share of the liquidity pool. Third parties have created additional financial products that allow depositing this bearer share and earning other assets for doing so. So people that want to passively earn have to provide liquidity and lock up that liquidity for some time, and it is working extremely well.
In this type of exchange system, order books and market makers are replaced by liquidity pools, where individuals put up two assets (for example a liquid asset like Ethereum and a less liquid asset that they wish to have liquidity in). This process automatically spawns a smart contract from a smart contract factory, which has all the functions for maintaining that liquidity pool in perpetuity. The smart contract has no administrator and it allows other market participants to trade in that asset. The additional beauty is that the other market participants do not even need "Ethereum" the liquid side of the trading pair in order to buy the asset, as the smart contract factory will route whichever asset the trader owners between liquidity pools. For example, if they had Tether, the smart contract factory will find the Tether/Ethereum liquidity pool, and the Ethereum/NewToken liquidity pool and exchange it at the best price.
Also anybody else can add extra liquidity to the liquidity pool.
All liquidity pool providers earn trading fees from people that buy and sell. Turning them all into market makers.
The final point is that the market decided that these trading fees are not a good enough incentive to add liquidity to liquidity pools, so it is important to know that all liquidity pool providers actually receive a bearer token representing their share of the liquidity pool. Third parties have created additional financial products that allow depositing this bearer share and earning other assets for doing so. So people that want to passively earn have to provide liquidity and lock up that liquidity for some time, and it is working extremely well.