Pré-Publication, Document De Travail Année : 2025

The economics of constant function market makers

Résumé

We use microeconomic theory to describe the inner workings of Constant Function Market Makers (CFMMs). We show that standard results from consumer theory apply in this new context, endowing us with powerful tools to characterize the optimal design of CFMMs. We employ them to analyze the externalities that traders and liquidity providers exert on each other when interacting through a CFMM. Liquidity providers reduce the execution costs by flattening the bonding curve on which trades are executed.

Arbitrageurs impose an adverse selection cost on liquidity providers by unfavorably rebalancing their portfolio. We show that the strengths of these two externalities are pinned down by the curvature of the bonding curve and are inversely related to each other, thereby identifying the fundamental economic tradeoff that market designers have to address.

Fichier principal
Vignette du fichier
CFMMs_Fabi_Prat_HAL.pdf (1.4 Mo) Télécharger le fichier
Origine Fichiers produits par l'(les) auteur(s)

Dates et versions

hal-04920095 , version 1 (29-01-2025)

Identifiants

Citer

Michele Fabi, Julien Prat. The economics of constant function market makers. 2024. ⟨hal-04920095⟩
0 Consultations
0 Téléchargements

Altmetric

Partager

More