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Automated Market Makers

Mohsen Pourpouneh (), Kurt Nielsen () and Omri Ross ()
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Mohsen Pourpouneh: Department of Food and Resource Economics, University of Copenhagen
Kurt Nielsen: Department of Food and Resource Economics, University of Copenhagen
Omri Ross: eToroX Labs, University of Copenhagen

No 2020/08, IFRO Working Paper from University of Copenhagen, Department of Food and Resource Economics

Abstract: A new type of Automated Market Makers (AMMs) powered by Blockchain technology keep liquidity on-chain and offer transparent price mechanisms. This innovation is a significant step in the direction of building a more transparent and efficient financial market. This paper explores analytically market mechanisms and shows the conditions when those mechanisms are equivalent. Furthermore, we show that AMM mechanisms inherently create loses for market makers from inefficient prices (dictated by the AMM solutions), however, these mechanisms work well for assets with low volatility. We further analytically explore the losses and quantify them. The paper ends by discussing the design of efficient decentralized exchange compared to traditional Central Limited Order Books (CLOBs) and highlights the former’s potential regarding decentralized finance.

Keywords: blockchain; decentralized exchanges; automated liquidity providers; auction; mechanism design (search for similar items in EconPapers)
JEL-codes: D53 G12 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2020-07
New Economics Papers: this item is included in nep-des, nep-fmk and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:foi:wpaper:2020_08

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