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About this paper
Yiling Chen, David M Pennock
Yiling Chen and David M. Pennock introduce a utility-based framework for automated market makers (AMMs), demonstrating its mathematical equivalence to market scoring rules and cost function approaches. The research establishes necessary and sufficient conditions for AMMs to have bounded worst-case losses and rigorously analyzes the fundamental trade-off between market liquidity and potential losses for the subsidizing entity.
Key insights
- Different automated market maker formulations (utility-based, market scoring rules, and cost function approaches) are mathematically equivalent under specific conditions.
- Bounded worst-case loss for a market maker is guaranteed if its utility function's domain is bounded below or its range is bounded above but not below.
- There is an inherent trade-off between instantaneous market liquidity and the market maker's potential losses, meaning market designers must choose between different liquidity profiles.
Summary by alphaXiv.
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