Core Concepts
Auction-managed AMM optimizes revenue and reduces losses for liquidity providers.
Abstract
The paper introduces the auction-managed AMM, addressing issues of minimizing losses to arbitrageurs and maximizing fee revenue. It presents a mechanism where a censorship-resistant auction determines the pool manager, who sets swap fees and captures arbitrage opportunities. Liquidity providers can freely enter and exit the pool, paying a small withdrawal fee. The AMM aims to attract more liquidity than fixed-fee AMMs in equilibrium.
- Introduction:
- AMMs face challenges of minimizing losses to arbitrageurs and optimizing fee revenue.
- The auction-managed AMM targets both issues with a single mechanism.
- Auction Design:
- The auction sets up a two-stage game for potential managers and liquidity providers.
- A Harberger lease auction determines the pool manager who can adjust swap fees.
- Theory:
- The model considers a constant product AMM with noise traders and arbitrageurs.
- Equilibrium analysis shows that the am-AMM attracts more liquidity than fixed-fee AMMs.
- Discussion:
- The AMM shifts the burden of fee optimization to the pool manager.
- Drawbacks include vulnerability to sandwich attacks and centralization risks.
Stats
"A withdrawal fee of 1 - 2·√fcap/fcap+1 is sufficient to protect managers from strategic liquidity withdrawals."
"The arb excess expression in (3) is σ2/8 * exp(-f/σ√(Δt/2)) * e^f/2 * (1 - σ^2Δt/8)."
Quotes
"The am-AMM will attract more liquidity than any fixed-fee AMM in equilibrium."