An automated market maker, or AMM, is the system many decentralized exchanges use to enable trading without a traditional order book. Instead of matching buyers and sellers, an AMM prices trades using a mathematical formula and a liquidity pool of funds supplied by users.
The formula adjusts the price automatically based on the balance of tokens in the pool. When someone buys one token, its share of the pool shrinks and its price rises slightly; selling does the reverse. This lets trades happen at any time, as long as there are funds in the pool.
AMMs made much of DeFi possible by removing the need for a central party to match orders. They also introduce their own dynamics, such as slippage on large trades and impermanent loss for liquidity providers. Understanding them helps explain how decentralized exchanges work.