The Economics of Automated Market Makers

Robin Fritsch, Samuel K\"aser and Roger Wattenhofer

Papers from arXiv.org

Abstract: This paper studies the question whether automated market maker protocols such as Uniswap can sustainably retain a portion of their trading fees for the protocol. We approach the problem by modelling how to optimally choose a pool's take rate, i.e\ the fraction of fee revenue that remains with the protocol, in order to maximize the protocol's revenue. The model suggest that if AMMs have a portion of loyal trade volume, they can sustainably set a non-zero take rate, even without losing liquidity to competitors with a zero take rate. Furthermore, we determine the optimal take rate depending on a number of model parameters including how much loyal trade volume pools have and how high the competitors' take rates are.

Date: 2022-06
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (3)

Published in Proceedings of the 4th ACM Conference on Advances in Financial Technologies (2022) 102-110

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2206.04634

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