Improving Capital Efficiency and Impermanent Loss: Multi-Token Proactive Market Maker

ArXiv ID: 2309.00632 “View on arXiv”

Authors: Unknown

Abstract

Current approaches to the cryptocurrency automated market makers result in poor impermanent loss and capital efficiency. We analyze the mechanics underlying DODO Exchange’s proactive market maker (PMM) to probe for solutions to these issues, leading to our key insight of multi-token trading pools. We explore this paradigm primarily through the construction of a generalization of PMM, the multi-token token proactive market maker (MPMM). We show via simulations that MPMM has better impermanent loss and capital efficiency than comparable market makers under a variety of market scenarios. We also test multi-token generalizations of other common 2-token pool market makers. Overall, this work demonstrates several advantages of multi-token pools and introduces a novel multi-token pool market maker.

Keywords: Automated Market Makers, Impermanent Loss, Capital Efficiency, Decentralized Finance, Liquidity Pools

Complexity vs Empirical Score

  • Math Complexity: 9.0/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats
  • Why: The paper presents dense mathematical derivations for the PMM and MPMM pricing curves and their properties, including marginal exchange rates, limits, and equilibrium dynamics, indicating high math complexity. However, it relies solely on simulations for evaluation, with no real-world backtesting, data-heavy analysis, or implementation details provided, resulting in low empirical rigor.
  flowchart TD
    A["Research Goal<br>Address Impermanent Loss &<br>Capital Efficiency in AMMs"] --> B["Analyze DODO's PMM<br>Core Mechanics & Limitations"]
    B --> C["Key Insight & Hypothesis<br>Multi-Token Pool Paradigm"]
    C --> D{"Methodology"}
    D --> E1["Simulate MPMM<br>Multi-Token PMM"]
    D --> E2["Simulate Generalized<br>Multi-Token 2-Token Pools"]
    E1 --> F["Compare vs<br>Standard AMMs (Uniswap v3)"]
    E2 --> F
    F --> G["Outcomes & Findings"]
    G --> H1["MPMM: Superior Impermanent<br>Loss & Capital Efficiency"]
    G --> H2["Multi-Token Generalizations<br>Show Viable Advantages"]
    G --> H3["Novel MPMM Market<br>Maker Introduced"]