AMM vs Order Book FAQ — How the Two Pricing Models Differ

What is the core difference?

Who sets the price.

In an order book, participants set it: people place buy and sell orders at prices they choose, and a trade happens when two cross. Price is the result of negotiation between humans and their algorithms.

In an AMM, a formula sets it: a pool holds two tokens and computes price from their balances. Nobody quotes anything; depositors simply supply capital and the formula does the market making.

That single difference produces every other one.

Which one runs out of liquidity?

An order book can. If you buy more than the total resting size, there is nothing left to fill against and your order is partially filled or rejected.

A constant-product AMM cannot. The curve is continuous, so any order fills — at a progressively worse price, without limit.

This sounds like an AMM advantage and frequently is not. An order book refusing to fill tells you your order is too large. An AMM silently fills it at a terrible price and reports success. See how decentralized exchanges work.

Which is cheaper?

Depends almost entirely on size relative to depth.

	Order book	AMM
Explicit cost	Maker/taker fee	Swap fee (~0.30% typical)
Size-dependent cost	Slippage walking the book	Price impact along the curve
Fixed overhead	None per trade	Gas, whether or not it succeeds
Failed trade	Costs nothing	Costs gas

Small trades on an AMM are dominated by gas. Large trades in a thin pool are dominated by impact, which is proportional to your size relative to the pool's reserves. Deep order books usually win on large orders; AMMs win where no market maker would bother quoting at all.

Why do AMMs exist if order books are more efficient?

Because order books need active participants. Someone must continuously quote both sides and manage inventory, and for a small or new token nobody will.

An AMM needs only passive deposits. That is why a token no professional would quote can still have a functioning market — a genuine expansion of what can be traded, not merely a technical alternative.

What is impermanent loss?

The cost carried by whoever supplies an AMM pool.

Because the formula rebalances reserves as prices move, a depositor ends up holding more of whichever asset fell and less of whichever rose, compared with simply holding both. The gap is impermanent loss.

The name is misleading: it is only "impermanent" if prices return to where they started. Fees earned may or may not exceed it.

Is a liquidity provider the same as a market maker?

No, and conflating them causes real confusion.

A market maker quotes both sides of an order book continuously, chooses its prices, profits from the spread, and actively manages inventory risk.

A liquidity provider deposits into a pool and earns a share of fees. It makes no pricing decisions at all — the formula does — and its exposure is impermanent loss rather than inventory management.

One is an active trading strategy; the other is a passive position with a specific payoff shape.

Can you have limit orders on an AMM?

Not natively — there is no book to rest in. Limit orders are built around the AMM as signed intents: you sign an order stating your acceptable price, and a third party executes it when doing so is profitable for them.

The important difference is that nobody is obliged to fill it. It can go unexecuted even if the price trades through your level. See how to place a DEX order.

What is price impact versus slippage?

Related but distinct, and interfaces display them side by side.

Price impact is the movement your own trade causes along the curve — deterministic, computable before you trade from pool reserves.

Slippage tolerance is how much additional adverse movement you accept between submitting and confirming, caused by other transactions landing first. On a public mempool it is also the budget available to anyone sandwiching your trade.

Raising tolerance does not reduce impact.

Which does CoinDock use?

CoinDock is an order-book exchange with price-time priority matching: better prices fill first, and among equal prices, earlier orders fill first.

That means active market making is required for a pair to work well, which is why our listing process asks who will quote a market. See liquidity for new coins.

AMM vs Order Book — Frequently Asked Questions