UAMM: Price-oracle based Automated Market Maker

ArXiv ID: 2308.06375 “View on arXiv”

Authors: Unknown

Abstract

Automated market makers (AMMs) are pricing mechanisms utilized by decentralized exchanges (DEX). Traditional AMM approaches are constrained by pricing solely based on their own liquidity pool, without consideration of external markets or risk management for liquidity providers. In this paper, we propose a new approach known as UBET AMM (UAMM), which calculates prices by considering external market prices and the impermanent loss of the liquidity pool. Despite relying on external market prices, our method maintains the desired properties of a constant product curve when computing slippages. The key element of UAMM is determining the appropriate slippage amount based on the desired target balance, which encourages the liquidity pool to minimize impermanent loss. We demonstrate that our approach eliminates arbitrage opportunities when external market prices are efficient.

Keywords: Automated Market Maker (AMM), Decentralized Exchange (DEX), Impermanent Loss, Arbitrage, Slippage

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats
• Why: The paper introduces a novel AMM mechanism with mathematical notation for state variables, transactions, and properties, but lacks any backtesting, empirical data, or implementation details in the provided excerpt, focusing instead on theoretical definitions and propositions.

  flowchart TD
    A["Research Goal: Develop AMM utilizing external price data<br>to manage impermanent loss & eliminate arbitrage"] --> B["Methodology: UAMM Price-Oracle Model"]
    B --> C{"Inputs"}
    C --> C1["External Market Price P_e"]
    C --> C2["Liquidity Pool State Reserves"]
    C --> C3["Target Balance Parameters"]
    B --> D["Computation: Dynamic Slippage Adjustment"]
    D --> D1["Calculate Impermanent Loss IL"]
    D --> D2["Determine Slippage S based on<br>deviation from target balance"]
    D --> D3["Update Price P_u = P_e * f S"]
    D --> D4["Simulate Constant Product Swap"]
    D --> E["Outcomes"]
    E --> E1["Elimination of Arbitrage Opportunities"]
    E --> E2["Mitigation of Impermanent Loss"]
    E --> E3["Efficient Pricing via External Oracles"]