An AMM is a protocol that uses mathematical formulas to price assets while providing and maintaining liquidity. This is different from an Order Book on a traditional exchange where pricing is done on an algorithm.
In traditional exchanges, like Binance or Coinbase, the way you trade assets against pairs is determined by having a counterparty (another trader) on the other side to make a trade with. This is a peer-to-peer transaction and it operates on supply and demand for the asset and within the trading pair.
An AMM works in a similar way, helping you exchange one asset for another, but it is more of a peer-to-contract type exchange. That is to say trades happen between users and contracts.
There is no order book on an AMM, and there are also no order types on. The pricing is not done through supply and demand, rather a formula instead. However, with there being no other party to trade with, or provide the asset, there needs to be some sort of provider.
This is where Liquidity Pools come into play. Liquidity providers are users that add funds to liquidity pools. These piles of funds are there for traders to trade against. These pools are incentivised in that providers earn fees from the trades that happen in their pool.
AMMs have become increasingly popular with the boom in Decentralized Finance (DeFi). DeFi is a way of viewing finance without 3rd-party interference and with full inclusivity. AMMs enable essentially anyone to create markets seamlessly and efficiently.
AMMs can also lead to ever-improving systems as added Liquidity can mean better rewards, as well as less slippage for larger orders. This, in turn, may attract more volume to the platform, and so on.
AMMs are certainly the next evolution for exchanges, moving on from order books. However, they are certainly still in their infancy. AMMs like Uniswap, Curve, and PancakeSwap encompass the DeFi mindset, but are quite limited in features. However, they are also rapidly evolving and more features are coming to the fore.