Lazy Liquidity in Automated Market Making

When does the tail wag the dog? Curvature and market making

“…This result is an analogue of classical market microstructure results involving multiplayer games between informed traders and market makers [36,28,27]. Our formulation extends the informed trader framework for Uniswap of [6] to general CFMMs through a two-player game where the informed trader makes a maximum bet [12] on the next market price update given an informational advantage. Using the curvature framework of §1, we illustrate a condition (similar to Glosten's classical bound [27]) that connects the informational edge of the informed trader and the curvature and fees of a CFMM to the payoffs of the informed trader and the LP.…”

The Homogeneous Properties of Automated Market Makers

“…In the light of the findings presented here and the unique level of transparency in the AMM markets, where traders are theoretically able to access apriori information on trades immediately prior to settlement [6], one may reasonably assume that these markets are characterized by symmetrical information flows and a high degree of stakeholder coordination. Yet, as suggested by [11],…”

“…In the light of the findings presented here and the unique level of transparency in the AMM markets, where traders are theoretically able to access apriori information on trades immediately prior to settlement [6], one may reasonably assume that these markets are characterized by symmetrical information flows and a high degree of stakeholder coordination. Yet, as suggested by [11], liquidity providers appear to exhibit behaviour tangent to strategic substitution, resulting in an adverse selection problem. The perhaps most illustrative example of this phenomenon was the so-called 'vampire attack' in which the emergent Uniswap competitor 'Sushiswap' launched an identical copy of the Uniswap AMM, subsidizing liquidity providers with a novel governance token design [1].…”

“…By pooling available liquidity in trading pairs or groups in the P2C model, AMMs eliminate the need for the presence of buyers and sellers at the same time, facilitating relatively seamless trade execution without compromising the deterministic integrity of the computational environment afforded by the blockchain. While the primary context for the formal literature on blockchain based AMM has been provided by Angeris and Chitra et al [8]- [10] the field has attracted new work on adjacent topics such as liquidity provisioning [11]- [13] and token weighted voting systems [1].…”

“…It is shown by[11] that the return on capital accumulated by liquidity providers is proportional to the square root of the exchange rate between the two assets.…”