Intermediating DFMM Asset (IDA)

Paper: arXiv 2311.05234

Authors: Arman Abgaryan, Utkarsh Sharma

Abstract

The Dynamic Function Market Maker (DFMM) introduced a fully automated framework for operating a multi-asset market, wherein an algorithmic accounting asset was used to connect different liquidity pools and ensure efficient rebalancing of risks, and internal accounting processes. In the DFMM design, this asset was not tradaeble; however, in this work, we explore the characteristics of this asset, if it were to be made tradeable. Named the Intermediating DFMM Asset (IDA), this asset serves as a unit of account in cross-chain finance, functioning as an intermediating asset for predictable budgeting, and efficient multichain transfers and settlements. Harnessing its robust liquidity as the key counterpart asset in DFMM, it achieves capital efficiency through the strategic repurposing of its asset base, while simultaneously mitigating risk via the dynamic optimisation of its multicollateral foundation. We outline key characteristics of the proposed asset, unique risk mitigation aspects enabled by the adopting AMM (DFMM), and control levers enabling the protocol’s tactical asset and liability management toolkit to harmonise the asset’s objectives with its real-world realisation, through a novel prudential market operation to incentivise productive use of a finite asset and dynamic AMM fee to ensure alignment of behaviours. The proposed design has the potential to harmonise the interests of diverse market participants, leading to synergetic reactions to informational flow, aiding IDA protocol in achieving its objectives.

Complexity vs Empirical Score

• Math Complexity: 4.5/10
• Empirical Rigor: 2.5/10
• Quadrant: Philosophers — conceptual discussion, limited math and data

Why this score: The paper presents an innovative theoretical expansion of Automated Market Maker (AMM) mechanics by making the internal accounting asset in DFMM tradeable. However, it lacks empirical backtesting, real-world data validation, and detailed mathematical derivations, relying primarily on conceptual frameworks and proposed control mechanisms.

Research Flowchart

  flowchart TD
    A["Research Goal: Evaluate making DFMM's non-tradeable accounting asset tradeable (IDA)"] --> B["Inputs: Multi-chain liquidity pools & Multicollateral foundation"]
    B --> C["Methodology: Model IDA as an intermediating, cross-chain unit of account"]
    C --> D["Computational Process: Dynamic AMM fee optimization & Tactical ALM control levers"]
    D --> E["Outcomes: Enhanced capital efficiency, predictable budgeting & dynamic risk mitigation"]

Cited References (33)

1. Dynamic Function Market Maker — → 2307.13624
2. In search for stability in crypto-assets: are stablecoins the solution? (2019)
3. Ampleforth: A new synthetic commodity (2019)
4. Intelligent design: stablecoins (in) stability and collateral during market turbulence (2023)
5. A ‘Fixed Value of Bullion’Standard—a Proposal for Preventing General Fluctuations of Trade (1892)
6. Irving Fisher and his compensated dollar plan (1993)
7. Explorations in the gold standard and related policies for stabilizing the dollar (1982)
8. USD Coin (USDC) | Fully Reserved Fiat-Backed Stablecoin.

1 of 33 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.