Automated Market Making with Synchronized Liquidity Pools

30 Pages Posted: 16 Nov 2021 Last revised: 22 Nov 2021

Date Written: November 15, 2021

Abstract

We propose a new approach to automated market making (AMM) by synchronizing two constant function market makers (CFMM). Our methodology combines the advantages of each individual CFMM and reduces the downside risk for liquidity providers (LP). The approach can be extended to any combination of AMMs. The application of our technique described in this paper is suitable for assets with high volatility that can deviate from the entry price for LPs. The deviation risk, compared to a buy-and-hold strategy and often referred to as impermanent loss can counterbalance the benefit of liquidity mining, that is the earning of associated trading fees. We show in this paper how our approach provides a way to largely limit the impact of such risk and compare the behavior of the new AMM to the well known exchanges, such as Uniswap and Balancer.

Keywords: automated market maker, liquidity provider return, decentralized finance

JEL Classification: G11

Suggested Citation

Falakshahi, Houman and Mariapragassam, Matthieu and Ajaja, Rachid, Automated Market Making with Synchronized Liquidity Pools (November 15, 2021). Available at SSRN: https://ssrn.com/abstract=3963811 or http://dx.doi.org/10.2139/ssrn.3963811

Matthieu Mariapragassam

affiliation not provided to SSRN

Rachid Ajaja

AllianceBlock ( email )

Radonweg 2D
Utrecht, 3542 AN
Netherlands

No contact information is available for Houman Falakshahi

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
686
Abstract Views
3,376
rank
53,859
PlumX Metrics