Price Discovery in Constant Product Markets

36 Pages Posted: 19 Oct 2023

See all articles by Magnus Hansson

Magnus Hansson

Stockholm University - Stockholm Business School

Date Written: September 25, 2023


Constant product markets are extensively used by decentralized exchanges within the blockchain ecosystem and are the most common type of automated market maker designs. This paper develops a price discovery framework for constant product markets that comprises three parts. Firstly, I derive a quadratic relationship that expresses trades in terms of price changes. Secondly, I model trade interactions in a structural VAR system. Thirdly, I translate the impulse responses from the VAR to returns through the quadratic equation. The empirical analysis reveals how large trades
carry important market information and how a small but sophisticated group of adversarial traders,
much like high-frequency traders in traditional markets, play a key role in price discovery on the
largest decentralized exchange Uniswap.

Keywords: Price discovery, Constant product market, Automated market maker, Decentralized exchange, Cryptocurrency, Decentralized finance, Blockchain, Ethereum, MEV,

JEL Classification: C55, C57, E42, G12, G14, G23

Suggested Citation

Hansson, Magnus, Price Discovery in Constant Product Markets (September 25, 2023). Available at SSRN: or

Magnus Hansson (Contact Author)

Stockholm University - Stockholm Business School ( email )


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