Optimal Automated Market Makers

Abstract

Blockchain technology has enabled intermediary-free exchanges in which trades are facilitated by automated market-making (AMM) algorithms. This paper shows that: 1) existing AMM designs in practice cannot allocate the trading needs of liquidity demanders among liquidity providers efficiently; 2) the optimal AMM design attaining efficient trading allocation is structured as a weighted geometric average over liquidity providers' preferences; 3) this optimal design emerges in equilibrium when these exchanges operate as a fully decentralized autonomous organization.

Keywords: Blockchain technology, Automated Market Maker, Decentralized Autonomous Organization