Template-Type: ReDIF-Paper 1.0
Author-Name: Mohsen Pourpouneh
Author-Name-First: Mohsen
Author-Name-Last: Pourpouneh
Author-Email: mohsen@ifro.ku.dk
Author-Workplace-Name: Department of Food and Resource Economics, University of Copenhagen
Author-Name: Kurt Nielsen
Author-Name-First: Kurt
Author-Name-Last: Nielsen
Author-Email: kun@ifro.ku.dk
Author-Workplace-Name: Department of Food and Resource Economics, University of Copenhagen
Author-Name: Omri Ross
Author-Name-First: Omri
Author-Name-Last: Ross
Author-Email: omri@di.ku.dk
Author-Workplace-Name: eToroX Labs, University of Copenhagen
Title: Automated Market Makers
Abstract: 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.
Length: 9 pages
Creation-Date: 2020-07
File-URL: http://okonomi.foi.dk/workingpapers/WPpdf/WP2020/IFRO_WP_2020_08.pdf
File-Format: Application/pdf
Number: 2020/08
Classification-JEL: D53, G12
Keywords: blockchain, decentralized exchanges, automated liquidity providers, auction, mechanism design
Handle: RePEc:foi:wpaper:2020_08