research-article

The Economics of Automated Market Makers

Authors:

Roger WattenhoferAuthors Info & Claims

AFT '22: Proceedings of the 4th ACM Conference on Advances in Financial Technologies

Pages 102 - 110

https://doi.org/10.1145/3558535.3559790

Published: 05 July 2023 Publication History

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.

References

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Hayden Adams, Noah Zinsmeister, Moody Saleh, River Keefer, and Dan Robinson. 2021. Uniswap v3 whitepaper. https://uniswap.org/whitepaper-v3.pdf

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Guillermo Angeris and Tarun Chitra. 2020. Improved Price Oracles: Constant Function Market Makers. In Proceedings of the 2nd ACM Conference on Advances in Financial Technologies (New York, NY, USA) (AFT '20). Association for Computing Machinery, New York, NY, USA, 80--91.

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Robin Fritsch. 2021. Concentrated Liquidity in Automated Market Makers. Association for Computing Machinery, New York, NY, USA, 15--20.

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Cited By

Manda VAbukari AGupta VBharathi M(2024)Revolutionizing Finance With Decentralized Finance (DeFi)Decentralizing the Online Experience With Web3 Technologies10.4018/979-8-3693-1532-3.ch006(127-150)Online publication date: 15-Mar-2024
https://doi.org/10.4018/979-8-3693-1532-3.ch006
He XYang CZhou Y(2024)Liquidity Pool Design on Automated Market MakersSSRN Electronic Journal10.2139/ssrn.4801468Online publication date: 2024
https://doi.org/10.2139/ssrn.4801468
Zhong JGao JXia HAdjei-Arthur BAdu Worae DLv HXia Q(2024)Blockchain-Based EV Constant Function Pricer and Oraclized State of Charge EstimatorIEEE Transactions on Intelligent Transportation Systems10.1109/TITS.2024.346989025:12(21769-21782)Online publication date: Dec-2024
https://doi.org/10.1109/TITS.2024.3469890
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cover image ACM Other conferences

AFT '22: Proceedings of the 4th ACM Conference on Advances in Financial Technologies

September 2022

330 pages

ISBN:9781450398619

DOI:10.1145/3558535

Chair:
Maurice Herlihy,
Program Chair:
Neha Narula

Copyright © 2022 ACM.

Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. Copyrights for components of this work owned by others than the author(s) must be honored. Abstracting with credit is permitted. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. Request permissions from [email protected].

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Association for Computing Machinery

New York, NY, United States

Publication History

Published: 05 July 2023

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AFT '22

AFT '22: 4th ACM Conference on Advances in Financial Technologies

September 19 - 21, 2022

MA, Cambridge, USA

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Cited By

Manda VAbukari AGupta VBharathi M(2024)Revolutionizing Finance With Decentralized Finance (DeFi)Decentralizing the Online Experience With Web3 Technologies10.4018/979-8-3693-1532-3.ch006(127-150)Online publication date: 15-Mar-2024
https://doi.org/10.4018/979-8-3693-1532-3.ch006
He XYang CZhou Y(2024)Liquidity Pool Design on Automated Market MakersSSRN Electronic Journal10.2139/ssrn.4801468Online publication date: 2024
https://doi.org/10.2139/ssrn.4801468
Zhong JGao JXia HAdjei-Arthur BAdu Worae DLv HXia Q(2024)Blockchain-Based EV Constant Function Pricer and Oraclized State of Charge EstimatorIEEE Transactions on Intelligent Transportation Systems10.1109/TITS.2024.346989025:12(21769-21782)Online publication date: Dec-2024
https://doi.org/10.1109/TITS.2024.3469890
Sorensen D(2024)(In)Correct Smart Contract Specifications2024 IEEE International Conference on Blockchain and Cryptocurrency (ICBC)10.1109/ICBC59979.2024.10634444(567-575)Online publication date: 27-May-2024
https://doi.org/10.1109/ICBC59979.2024.10634444
Miori DCucuringu M(2024)Clustering Uniswap v3 traders from their activity on multiple liquidity pools, via novel graph embeddingsDigital Finance10.1007/s42521-024-00105-46:1(113-143)Online publication date: 30-Jan-2024
https://doi.org/10.1007/s42521-024-00105-4
Bergault PBertucci LBouba DGuéant O(2023)Automated market makers: mean-variance analysis of LPs payoffs and design of pricing functionsDigital Finance10.1007/s42521-023-00101-06:2(225-247)Online publication date: 27-Dec-2023
https://doi.org/10.1007/s42521-023-00101-0
Auer RHaslhofer BKitzler SSaggese PVictor F(2023)The technology of decentralized finance (DeFi)Digital Finance10.1007/s42521-023-00088-86:1(55-95)Online publication date: 1-Aug-2023
https://doi.org/10.1007/s42521-023-00088-8
Cartea ÁDrissi FMonga M(undefined)Decentralised Finance and Automated Market Making: Execution and SpeculationSSRN Electronic Journal10.2139/ssrn.4144743
https://doi.org/10.2139/ssrn.4144743

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