A Note on Optimal Fees for Constant Function Market Makers

Robin Fritsch and Roger Wattenhofer

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Abstract: We suggest a framework to determine optimal trading fees for constant function market makers (CFMMs) in order to maximize liquidity provider returns. In a setting of multiple competing liquidity pools, we show that no race to the bottom occurs, but instead pure Nash equilibria of optimal fees exist. We theoretically prove the existence of these equilibria for pools using the constant product trade function used in popular CFMMs like Uniswap. We also numerically compute the equilibria for a number of examples and discuss the effects the equilibrium fees have on capital allocation among pools. Finally, we use our framework to compute optimal fees for real world pools using past trade data.

Date: 2021-05
New Economics Papers: this item is included in nep-gth
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Published in Proceedings of the 2021 ACM CCS Workshop on Decentralized Finance and Security (2021) 9-14

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