Liquidity Implication of Constant Product Market Makers

Aoyagi, Jun; Ito, Yuki

doi:10.2139/ssrn.3808755

Cited by 14 publications

(9 citation statements)

References 34 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Many papers study the profitability of providing liquidity to AMMs. For instance, [24] and [25] research the relationship between information sets of traders, LP returns and the choice between centralized and decentralized exchanges. [26] analyze the risk profile of LPs and discuss differences in the presence of concentrated liquidity.…”

Section: Related Workmentioning

confidence: 99%

Decentralized Exchanges: The Profitability Frontier of Constant Product Market Makers

Bitterli¹,

Schär²

2023

Preprint

View full text Add to dashboard Cite

In this paper we analyze constant product market makers (CPMMs). We formalize the liquidity providers' profitability conditions and introduce a concept we call the profitability frontier in the xyk-space. We study the effect of mint and burn fees on the profitability frontier, consider various pool types, and compile a large data set from all Uniswap V2 transactions. We use this data to further study our theoretical framework and the profitability conditions. We show how the profitability of liquidity provision is severely affected by the costs of mint and burn events relative to the portfolio size and the characteristics of the trading pair.

show abstract

Section: Related Workmentioning

confidence: 99%

Decentralized Exchanges: The Profitability Frontier of Constant Product Market Makers

Bitterli¹,

Schär²

2023

Preprint

View full text Add to dashboard Cite

show abstract

“…Another line of work analyzes competition between CFMMs and LOBs and the consequent liquidity properties of both at equilibrium (Aoyagi 2020;Aoyagi and Ito 2021;Capponi and Jia 2021). Goyal et al (2022) consider the computational complexity of computing such equilibria.…”

Section: Literature Reviewmentioning

confidence: 99%

Complexity-Approximation Trade-offs in Exchange Mechanisms: AMMs vs. LOBs

Milionis¹,

Moallemi²,

Roughgarden³

2023

Preprint

View full text Add to dashboard Cite

This paper presents a general framework for the design and analysis of exchange mechanisms between two assets that unifies and enables comparisons between the two dominant paradigms for exchange, constant function market markers (CFMMs) and limit order books (LOBs). In our framework, each liquidity provider (LP) submits to the exchange a downward-sloping demand curve, specifying the quantity of the risky asset it wishes to hold at each price; the exchange buys and sells the risky asset so as to satisfy the aggregate submitted demand. In general, such a mechanism is budget-balanced (i.e., it stays solvent and does not make or lose money) and enables price discovery (i.e., arbitrageurs are incentivized to trade until the exchange's price matches the external market price of the risky asset). Different exchange mechanisms correspond to different restrictions on the set of acceptable demand curves.The primary goal of this paper is to formalize an approximation-complexity trade-off that pervades the design of exchange mechanisms. For example, CFMMs give up expressiveness in favor of simplicity: the aggregate demand curve of the LPs can be described using constant space (the liquidity parameter), but most demand curves cannot be well approximated by any function in the corresponding single-dimensional family. LOBs, intuitively, make the opposite trade-off: any downward-slowing demand curve can be well approximated by a collection of limit orders, but the space needed to describe the state of a LOB can be large.This paper introduces a general measure of exchange complexity, defined by the minimal set of basis functions that generate, through their conical hull, all of the demand functions allowed by an exchange. With this complexity measure in place, we investigate the design of optimally expressive exchange mechanisms, meaning the lowest complexity mechanisms that

show abstract

“…There has been extensive study on the design of CFMM trading curves [12,16,34] and how the design of a CFMM curve interacts with the economic incentives of liquidity providers [24,36,37,52,58,59]. Another important topic of study is the economic interaction between a CFMM and a continuous double-auction or external market [14,17,18,49].…”

Section: Related Workmentioning

confidence: 99%

Batch Exchanges with Constant Function Market Makers: Axioms, Equilibria, and Computation

Goyal¹,

Ramseyer²,

Goel³

et al. 2022

Preprint

View full text Add to dashboard Cite

Batch trading systems and constant function market makers (CFMMs) are two distinct market design innovations that have recently come to prominence as ways to address some of the shortcomings of decentralized trading systems. However, different deployments have chosen substantially different methods for integrating the two innovations.We show here from a minimal set of axioms describing the beneficial properties of each innovation that there is in fact only one, unique method for integrating CFMMs into batch trading schemes that preserves all the beneficial properties of both. Deployment of a batch trading schemes trading many assets simultaneously requires a reliable algorithm for approximating equilibria in Arrow-Debreu exchange markets. We study this problem when batches contain limit orders and CFMMs. Specifically, we find that CFMM design affects the asymptotic complexity of the problem, give an easily-checkable criterion to validate that a user-submitted CFMM is computationally tractable in a batch, and give a convex program that computes equilibria on batches of limit orders and CFMMs. Equivalently, this convex program computes equilibria of Arrow-Debreu exchange markets when every agent's demand response satisfies weak gross substitutability and every agent has utility for only two types of assets. This convex program has rational solutions when run on many (but not all) natural classes of widely-deployed CFMMs.

show abstract

Liquidity Implication of Constant Product Market Makers

Cited by 14 publications

References 34 publications

Decentralized Exchanges: The Profitability Frontier of Constant Product Market Makers

Decentralized Exchanges: The Profitability Frontier of Constant Product Market Makers

Complexity-Approximation Trade-offs in Exchange Mechanisms: AMMs vs. LOBs

Batch Exchanges with Constant Function Market Makers: Axioms, Equilibria, and Computation

Contact Info

Product

Resources

About