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A General Framework for Impermanent Loss in Automated Market Makers

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Listed:
  • Neelesh Tiruviluamala
  • Alexander Port
  • Erik Lewis

Abstract

We provide a framework for analyzing impermanent loss for general Automated Market Makers (AMMs) and show that Geometric Mean Market Makers (G3Ms) are in a rigorous sense the simplest class of AMMs from an impermanent loss viewpoint. In this context, it becomes clear why automated market makers like Curve ([Ego19]) require more parameters in order to specify impermanent loss. We suggest the proper parameter space on which impermanent loss should be considered and prove results that help in understanding the impermanent loss characteristics of different AMMs.

Suggested Citation

  • Neelesh Tiruviluamala & Alexander Port & Erik Lewis, 2022. "A General Framework for Impermanent Loss in Automated Market Makers," Papers 2203.11352, arXiv.org.
    • Handle: RePEc:arx:papers:2203.11352
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    File URL: http://arxiv.org/pdf/2203.11352
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    References listed on IDEAS

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    1. Nassib Boueri, 2021. "G3M Impermanent Loss Dynamics," Papers 2108.06593, arXiv.org, revised Jun 2022.
    2. Guillermo Angeris & Tarun Chitra, 2020. "Improved Price Oracles: Constant Function Market Makers," Papers 2003.10001, arXiv.org, revised Jun 2020.
    3. Alex Evans, 2020. "Liquidity Provider Returns in Geometric Mean Markets," Papers 2006.08806, arXiv.org, revised Jul 2020.
    4. Guillermo Angeris & Alex Evans & Tarun Chitra, 2020. "When does the tail wag the dog? Curvature and market making," Papers 2012.08040, arXiv.org.
    5. Guillermo Angeris & Alex Evans & Tarun Chitra, 2021. "Replicating Market Makers," Papers 2103.14769, arXiv.org.
    6. Agostino Capponi & Ruizhe Jia, 2021. "The Adoption of Blockchain-based Decentralized Exchanges," Papers 2103.08842, arXiv.org, revised Jul 2021.
    7. Andreas A. Aigner & Gurvinder Dhaliwal, 2021. "UNISWAP: Impermanent Loss and Risk Profile of a Liquidity Provider," Papers 2106.14404, arXiv.org.
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    Cited by:

    1. Alexander Port & Neelesh Tiruviluamala, 2022. "Mixing Constant Sum and Constant Product Market Makers," Papers 2203.12123, arXiv.org, revised Apr 2022.
    2. Adam Khakhar & Xi Chen, 2022. "Delta Hedging Liquidity Positions on Automated Market Makers," Papers 2208.03318, arXiv.org, revised Dec 2022.

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