Automated Market Maker

An AMM maintains a pool of collateral and a set of outcome share quantities. When a trader buys YES shares on a Binary Market, the pool issues new YES shares and absorbs the payment. The cost function then recalculates the price of every outcome based on updated share quantities. On Polymarket, this mechanism used a constant-product formula (x * y = k) where buying YES shares increases the YES price and lowers the NO price automatically. The key advantage is instant Liquidity: unlike a Limit Order book that requires a willing counterparty, an AMM always quotes a price. The trade-off is that prices can move adversely against the trader for large orders, a phenomenon measured as Slippage.

Prediction market platforms have evolved to use different Liquidity architectures. Polymarket began with an AMM model and later introduced a central limit order book (CLOB) layer on top. Kalshi operates a pure CLOB from the start. AMMs are particularly useful when bootstrapping new markets with limited participation because the pool provides immediate quotes without needing two-sided human liquidity. CLOBs, by contrast, tend to produce tighter spreads and less Slippage when many traders are active, since competitive Limit Order placement narrows the Bid-Ask Spread. Hybrid systems attempt to combine the always-available pricing of AMMs with the efficiency of order-book competition, attracting both passive Liquidity Provider capital and active market makers.