What Is an AMM? Automated Market Makers in Prediction Markets
An Automated Market Maker (AMM) is an algorithm that provides liquidity and sets prices using a mathematical formula instead of a traditional order book.
Definition
An Automated Market Maker (AMM) is a smart contract that uses a mathematical formula to set prices and provide liquidity for trades. Instead of matching buyers and sellers through an order book, AMMs use pools of tokens and algorithms to determine prices.
AMMs in Prediction Markets
Early on-chain prediction markets (like Augur v1) used AMMs to bootstrap liquidity. The most common formula is the Logarithmic Market Scoring Rule (LMSR), which adjusts prices based on the number of shares sold for each outcome.
AMM vs Order Book: Which Is Better?
| Feature | AMM | Order Book (CLOB) |
|---|---|---|
| Liquidity source | Algorithm | Market makers |
| Spreads | Wide (5-15%) | Tight (1-2%) |
| Price accuracy | Lower | Higher |
| Capital efficiency | Low | High |
| Slippage | High for large trades | Depends on depth |
| Requires market makers | No | Yes |
Why Purrdict Uses an Order Book
Purrdict is built on Hyperliquid’s central limit order book rather than an AMM. This provides tighter spreads, better price discovery, and lower slippage. The trade-off is that liquidity depends on market makers — but Hyperliquid’s existing market maker ecosystem provides deep books.
For traders, this means better execution prices and more accurate probability signals.