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A Theory of Automated Market Makers in DeFi

Abstract : Automated market makers (AMMs) are one of the most prominent decentralized finance (DeFi) applications. They allow users to exchange units of different types of crypto-assets, 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.
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https://hal.inria.fr/hal-03387829
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Submitted on : Wednesday, October 20, 2021 - 8:59:21 AM
Last modification on : Friday, November 25, 2022 - 6:54:06 PM
Long-term archiving on: : Friday, January 21, 2022 - 7:18:09 PM

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Massimo Bartoletti, James Hsin-Yu Chiang, Alberto Lluch-Lafuente. A Theory of Automated Market Makers in DeFi. 23th International Conference on Coordination Languages and Models (COORDINATION), Jun 2021, Valletta, Malta. pp.168-187, ⟨10.1007/978-3-030-78142-2_11⟩. ⟨hal-03387829⟩

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