Part 4/7:
In contrast, AMMs like Uniswap operate without a traditional order book system. Instead, they rely on liquidity pools that contain tokens in a set ratio. When a trader wishes to swap tokens, they do so based on this ratio. The pricing mechanism is automated; as trades occur, the relative quantities of the tokens in the pool adjust, causing price changes dependent on supply and demand.
This method is particularly advantageous for less liquid markets where assets may not have enough trading volume to support an order book. Users can trade at any time without waiting for a seller to match their order.