am-AMM: An Auction-Managed Automated Market Maker

ArXiv ID: 2403.03367 “View on arXiv”

Authors: Unknown

Abstract

Automated market makers (AMMs) have emerged as the dominant market mechanism for trading on decentralized exchanges implemented on blockchains. This paper presents a single mechanism that targets two important unsolved problems for AMMs: reducing losses to informed orderflow, and maximizing revenue from uninformed orderflow. The auction-managed AMM'' works by running a censorship-resistant onchain auction for the right to temporarily act as pool manager’’ for a constant-product AMM. The pool manager sets the swap fee rate on the pool, and also receives the accrued fees from swaps. The pool manager can exclusively capture some arbitrage by trading against the pool in response to small price movements, and also can set swap fees incorporating price sensitivity of retail orderflow and adapting to changing market conditions, with the benefits from both ultimately accruing to liquidity providers. Liquidity providers can enter and exit the pool freely in response to changing rent, though they must pay a small fee on withdrawal. We prove that under certain assumptions, this AMM should have higher liquidity in equilibrium than any standard, fixed-fee AMM.

Keywords: Automated Market Maker (AMM), Decentralized Exchange (DEX), Liquidity Provision, Arbitrage, Blockchain, Cryptocurrency

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats
  • Why: The paper contains significant theoretical modeling and formal proofs of equilibrium properties, but lacks empirical backtesting, code, or datasets, focusing instead on theoretical mechanism design.
  flowchart TD
    A["Research Goal<br>Optimize AMM for<br>Informed & Uninformed Flow"] --> B["Key Methodology<br>Auction-Managed AMM"]
    B --> C{"Data & Inputs<br>Market Conditions & Orderflow"}
    C --> D["Computational Process<br>Auction for Pool Manager Role"]
    D --> E["Manager Actions<br>Set Swap Fee & Trade Arbitrage"]
    E --> F["Liquidity Providers<br>Enter/Exit based on Rent"]
    F --> G["Key Outcomes<br>Higher Equilibrium Liquidity"]
    G --> H["Result<br>Maximize LP Revenue<br>Minimize Informed Loss"]