Slippage in AMM Markets

Abstract

The crypto market is growing at an unprecedented rate, but it can be difficult to make money in this market if you don't understand how it works. Most people are still using traditional methods to trade in the crypto market, which can lead to losses due to significantly adverse pricing, known as slippage. In this paper, we 1) explain the key differences between Automated Market Making (AMM) used in crypto trading and traditional limit-order book-based market making, 2) show crypto price formation step-by-step, and 3) derive a closed-form solution for ex-ante crypto slippage estimation that can be used to extract better profits from crypto trading.

Keywords: AMM, Crypto, Market-making, trading, liquidity, slippage

JEL Classification: D02, C6, C7, C8