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About this paper
Andrea Canidio, Robin Fritsch
A Function-Maximizing Automated Market Maker (FM-AMM) design, incorporating batch trading, aligns its prices with external market equilibria to eliminate arbitrage profits and sandwich attacks in decentralized finance. Empirical analysis shows that FM-AMM liquidity providers can achieve equal or higher returns than Uniswap v3 across most token pairs, potentially redirecting hundreds of millions in Maximal Extractable Value (MEV) to LPs annually.
Key insights
- Competitive arbitrageurs, in conjunction with batch processing, eliminate arbitrage profits and sandwich attacks in an FM-AMM by consistently forcing its price to match external market equilibrium.
- The FM-AMM is formally equivalent to a 'clearing-price consistent AMM' and its inherent path dependence necessitates batching to prevent strategic trade splitting and maintain its properties.
- In contrast to risk-averse CFAMMs, the FM-AMM is shown to be 'risk-loving' with respect to its objective function, implying higher price volatility can lead to a greater expected function value.
Summary by alphaXiv.
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