Predictive crypto-asset automated market maker architecture for decentralized finance using deep reinforcement learning

Tristan Lim ()
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Tristan Lim: Nanyang Polytechnic

Financial Innovation, 2024, vol. 10, issue 1, 1-29

Abstract: Abstract This study proposes a quote-driven predictive automated market maker (AMM) platform with on-chain custody and settlement functions, alongside off-chain predictive reinforcement learning capabilities, to improve the liquidity provision of real-world AMMs. The proposed architecture augments Uniswap V3, a cryptocurrency AMM protocol, by using a novel market equilibrium pricing to reduce divergence and slippage losses. Furthermore, the proposed architecture involves a predictive AMM capability, for which a deep hybrid long short-term memory (LSTM) and Q-learning reinforcement learning framework is used. It seeks to improve market efficiency through obtaining more accurate forecasts of liquidity concentration ranges, where liquidity starts moving to expected concentration ranges prior to asset price movement; thus, liquidity utilization is improved. The augmented protocol framework is expected to have practical real-world implications through (1) reducing divergence loss for liquidity providers; (2) reducing slippage for crypto-asset traders; and (3) improving capital efficiency for liquidity provision for the AMM protocol. The proposed architecture is empirically benchmarked against the well-established Uniswap V3 AMM architecture. The preliminary findings indicate that the novel AMM framework offers enhanced capital efficiency, reduced divergence loss, and diminished slippage, which could potentially address several of the challenges inherent to AMMs.

Keywords: Predictive automated market maker architecture; Decentralized finance; Deep reinforcement learning; Divergence (or impermanent loss) and slippage losses; Capital efficiency; Liquidity utilization; concentration and depth (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s40854-024-00660-0

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