Automated Market Makers

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IFRO Working Paper ; No. 2020/08

Classification and Topics

• Classification: Wirtschaft ; General Equilibrium and Disequilibrium: Financial Markets ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: blockchain ; decentralized exchanges ; automated liquidity providers ; auction ; mechanism design

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Pourpouneh, Mohsen ; Nielsen, Kurt ; Ross, Omri
• Event: Veröffentlichung
• (who): University of Copenhagen, Department of Food and Resource Economics (IFRO)
• (where): Copenhagen
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/222424
• Last update: 10.03.2025, 11:43 AM CET