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Presentation and Publication: Loss and Slippage in Networks of Automated Market Makers

Authors Daniel Engel, Maurice Herlihy

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Author Details

Daniel Engel
  • Computer Science Department, Brown University, Providence, RI, USA
Maurice Herlihy
  • Computer Science Department, Brown University, Providence, RI, USA

Funding

  • Engel, Daniel: This research was supported by NSF grant 1917990.
  • Herlihy, Maurice: This research was supported by NSF grant 1917990.

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Daniel Engel and Maurice Herlihy. Presentation and Publication: Loss and Slippage in Networks of Automated Market Makers. In 3rd International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2021). Open Access Series in Informatics (OASIcs), Volume 97, pp. 13:1-13:23, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2022)
https://doi.org/10.4230/OASIcs.Tokenomics.2021.13

Abstract

Automated market makers (AMMs) are smart contracts that automatically trade electronic assets according to a mathematical formula. This paper investigates how an AMM’s formula affects the interests of liquidity providers, who endow the AMM with assets, and traders, who exchange one asset for another at the AMM’s rates. Linear slippage measures how a trade’s size affects the trader’s return, angular slippage measures how a trade’s size affects the subsequent market price, divergence loss measures the opportunity cost of providers' investments, and load balances the costs to traders and providers. We give formal definitions for these costs, show that they obey certain conservation laws: these costs can be shifted around but never fully eliminated. We analyze how these costs behave under composition, when simple individual AMMs are linked to form more complex networks of AMMs.

Subject Classification

ACM Subject Classification
  • Theory of computation → Algorithmic mechanism design
Keywords
  • Decentralized Finance
  • AMM
  • Uniswap

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