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Improving Capital Efficiency and Impermanent Loss: Multi-Token Proactive Market Maker

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  • Wayne Chen
  • Songwei Chen
  • Preston Rozwood

Abstract

Current approaches to the cryptocurrency automated market makers result in poor impermanent loss and fragmented liquidity. We focus on the development and analysis of a multi-token proactive market maker (MPMM). MPMM is an extension of the proactive market maker (PMM) introduced by DODO Exchange, which generalizes the constant product market maker (CPMM) and allows for adjustments to the pricing curve's ``flatness" and equilibrium points. We analyze these mechanics as used in both PMM and MPMM and demonstrate via simulation that MPMM significantly improves capital efficiency and price impact compared to its 2-token pool counterparts as well as their multi-token pool generalizations. Furthermore, in typical market conditions, MPMM also combats impermanent loss more effectively than other market maker variants. Overall, this research highlights the advantages multi-token market makers have over pairwise-token models, and poses a novel market making algorithm. The findings provide valuable insights for designing market makers that optimize capital efficiency and mitigate risks in decentralized finance ecosystems.

Suggested Citation

  • Wayne Chen & Songwei Chen & Preston Rozwood, 2023. "Improving Capital Efficiency and Impermanent Loss: Multi-Token Proactive Market Maker," Papers 2309.00632, arXiv.org.
    • Handle: RePEc:arx:papers:2309.00632
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    File URL: http://arxiv.org/pdf/2309.00632
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