Massimo Bartoletti ; James Hsin-yu Chiang ; Alberto Lluch-Lafuente - A theory of Automated Market Makers in DeFi

lmcs:8955 - Logical Methods in Computer Science, December 19, 2022, Volume 18, Issue 4 -
A theory of Automated Market Makers in DeFiArticle

Authors: Massimo Bartoletti ORCID; James Hsin-yu Chiang ORCID; Alberto Lluch-Lafuente ORCID

    Automated market makers (AMMs) are one of the most prominent decentralized finance (DeFi) applications. AMMs allow users to trade different types of crypto-tokens, without the need to find a counter-party. There are several implementations and models for AMMs, featuring a variety of sophisticated economic mechanisms. We present a theory of AMMs. The core of our theory is an abstract operational model of the interactions between users and AMMs, which can be concretised by instantiating the economic mechanisms. We exploit our theory to formally prove a set of fundamental properties of AMMs, characterizing both structural and economic aspects. We do this by abstracting from the actual economic mechanisms used in implementations, and identifying sufficient conditions which ensure the relevant properties. Notably, we devise a general solution to the arbitrage problem, the main game-theoretic foundation behind the economic mechanisms of AMMs.

    Volume: Volume 18, Issue 4
    Published on: December 19, 2022
    Accepted on: November 18, 2022
    Submitted on: January 13, 2022
    Keywords: Computer Science - Formal Languages and Automata Theory,Computer Science - Computer Science and Game Theory,68N30,I.6.4
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    • Cyber Security Network of Competence Centres for Europe; Funder: European Commission; Code: 830929
    • Subgroups of tree almost automorphism groups; Funder: Swiss National Science Foundation; Code: 175106

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