Automated Market Making with Synchronized Liquidity Pools
30 Pages Posted: 16 Nov 2021 Last revised: 22 Nov 2021
Date Written: November 15, 2021
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
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