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SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) Protocols

Author

Listed:
  • Jiahua Xu
  • Krzysztof Paruch
  • Simon Cousaert
  • Yebo Feng

Abstract

As an integral part of the decentralized finance (DeFi) ecosystem, decentralized exchanges (DEXs) with automated market maker (AMM) protocols have gained massive traction with the recently revived interest in blockchain and distributed ledger technology (DLT) in general. Instead of matching the buy and sell sides, automated market makers (AMMs) employ a peer-to-pool method and determine asset price algorithmically through a so-called conservation function. To facilitate the improvement and development of automated market maker (AMM)-based decentralized exchanges (DEXs), we create the first systematization of knowledge in this area. We first establish a general automated market maker (AMM) framework describing the economics and formalizing the system's state-space representation. We then employ our framework to systematically compare the top automated market maker (AMM) protocols' mechanics, illustrating their conservation functions, as well as slippage and divergence loss functions. We further discuss security and privacy concerns, how they are enabled by automated market maker (AMM)-based decentralized exchanges (DEXs)' inherent properties, and explore mitigating solutions. Finally, we conduct a comprehensive literature review on related work covering both decentralized finance (DeFi) and conventional market microstructure.

Suggested Citation

  • Jiahua Xu & Krzysztof Paruch & Simon Cousaert & Yebo Feng, 2021. "SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) Protocols," Papers 2103.12732, arXiv.org, revised Mar 2023.
    • Handle: RePEc:arx:papers:2103.12732
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    References listed on IDEAS

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    1. ., 2020. "Taxes for which state?," Chapters, in: Tax Tyranny, chapter 11, pages 163-176, Edward Elgar Publishing.
    2. Chris Dai, 2020. "DEX: A DApp for the Decentralized Marketplace," Economics, Law, and Institutions in Asia Pacific, in: Makoto Yano & Chris Dai & Kenichi Masuda & Yoshio Kishimoto (ed.), Blockchain and Crypto Currency, chapter 0, pages 95-106, Springer.
    3. Alex Evans, 2020. "Liquidity Provider Returns in Geometric Mean Markets," Papers 2006.08806, arXiv.org, revised Jul 2020.
    4. Daniel Perez & Sam M. Werner & Jiahua Xu & Benjamin Livshits, 2020. "Liquidations: DeFi on a Knife-edge," Papers 2009.13235, arXiv.org, revised Dec 2021.
    5. Andreas Richardson & Jiahua Xu, 2020. "Carbon Trading with Blockchain," Springer Proceedings in Business and Economics, in: Panos Pardalos & Ilias Kotsireas & Yike Guo & William Knottenbelt (ed.), Mathematical Research for Blockchain Economy, pages 105-124, Springer.
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    Citations

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    Cited by:

    1. Abrar Rahman & Victor Shi & Matthew Ding & Elliot Choi, 2022. "Systematization of Knowledge: Synthetic Assets, Derivatives, and On-Chain Portfolio Management," Papers 2209.09958, arXiv.org.
    2. Auer, Raphael & Haslhofer, Bernhard & Kitzler, Stefan & Saggese, Pietro & Friedhelm, Victor, 2023. "The Technology of Decentralized Finance (DeFi)," CEPR Discussion Papers 18038, C.E.P.R. Discussion Papers.
    3. Jiahua Xu & Yebo Feng, 2022. "Reap the Harvest on Blockchain: A Survey of Yield Farming Protocols," Papers 2210.04194, arXiv.org, revised Dec 2022.
    4. Junliang Luo & Stefan Kitzler & Pietro Saggese, 2024. "Investigating Similarities Across Decentralized Financial (DeFi) Services," Papers 2404.00034, arXiv.org.
    5. Simon Cousaert & Jiahua Xu & Toshiko Matsui, 2021. "SoK: Yield Aggregators in DeFi," Papers 2105.13891, arXiv.org, revised Mar 2022.
    6. Andrew W. Macpherson, 2023. "Adversarial blockchain queues and trading on a CFMM," Papers 2302.01663, arXiv.org, revised Feb 2023.
    7. Tobias Bitterli & Fabian Schar, 2023. "Decentralized Exchanges: The Profitability Frontier of Constant Product Market Makers," Papers 2302.05219, arXiv.org, revised Mar 2023.
    8. Daniel Kirste & Niclas Kannengie{ss}er & Ricky Lamberty & Ali Sunyaev, 2023. "How Automated Market Makers Approach the Thin Market Problem in Cryptoeconomic Systems," Papers 2309.12818, arXiv.org, revised Sep 2023.
    9. Qin Wang & Guangsheng Yu & Shiping Chen, 2023. "Cryptocurrency in the Aftermath: Unveiling the Impact of the SVB Collapse," Papers 2311.10720, arXiv.org.
    10. Kenan Wood & Maurice Herlihy & Hammurabi Mendes & Jonad Pulaj, 2024. "Expiring Assets in Automated Market Makers," Papers 2401.04289, arXiv.org.

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