What Is AMM (Automated Market Maker)?

An AMM is a smart contract that eliminates the need for traditional order books by using liquidity pools—reserves of two tokens that traders swap against. Instead of waiting for a counterparty, you trade directly against the pool's locked capital. The price adjusts automatically based on the ratio of tokens in the pool, typically following the formula x*y=k (where x and y are token amounts).

For airdrop farmers, AMMs are critical because they're where you'll spend most of your capital when positioning for airdrops. When Arbitrum airdropped to early users, many farmers had swapped through Uniswap (the largest AMM on Ethereum). When Hyperliquid launched, traders who had accumulated tokens through the dApp needed AMMs to exit or rebalance. Jito validators farming MEV rewards often need to swap their rewards through AMMs to compound back into LSTs or other yield strategies.

Why AMMs Matter for Airdrop Farming

Airdrop farming often requires deploying capital into multiple chains and protocols quickly. AMMs let you move between assets without waiting for liquidity—this speed is valuable when eligible snapshots are announced. They also generate yield farming opportunities; you can deposit your tokens into Uniswap V3 positions or Curve pools to earn LP fees while waiting for airdrop eligibility windows to close. Many protocols reward LP holders specifically (e.g., Optimism rewarded Uniswap LPs), making AMM participation a direct farming strategy.

Understand impermanent loss and slippage before farming AMM positions. A 10% pool position exposed to volatile tokens can shrink significantly if prices move sharply—this directly impacts your capital efficiency for other farming opportunities.