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The Economics of Automated Market Makers

Author

Listed:
  • Robin Fritsch
  • Samuel Kaser
  • Roger Wattenhofer

Abstract

This paper studies the question whether automated market maker protocols such as Uniswap can sustainably retain a portion of their trading fees for the protocol. We approach the problem by modelling how to optimally choose a pool's take rate, i.e\ the fraction of fee revenue that remains with the protocol, in order to maximize the protocol's revenue. The model suggest that if AMMs have a portion of loyal trade volume, they can sustainably set a non-zero take rate, even without losing liquidity to competitors with a zero take rate. Furthermore, we determine the optimal take rate depending on a number of model parameters including how much loyal trade volume pools have and how high the competitors' take rates are.

Suggested Citation

  • Robin Fritsch & Samuel Kaser & Roger Wattenhofer, 2022. "The Economics of Automated Market Makers," Papers 2206.04634, arXiv.org.
    • Handle: RePEc:arx:papers:2206.04634
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    References listed on IDEAS

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    1. Guillermo Angeris & Tarun Chitra & Alex Evans & Stephen Boyd, 2022. "Optimal Routing for Constant Function Market Makers," Papers 2204.05238, arXiv.org.
    2. Sam M. Werner & Daniel Perez & Lewis Gudgeon & Ariah Klages-Mundt & Dominik Harz & William J. Knottenbelt, 2021. "SoK: Decentralized Finance (DeFi)," Papers 2101.08778, arXiv.org, revised Sep 2022.
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    Cited by:

    1. 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.
    2. Deborah Miori & Mihai Cucuringu, 2022. "DeFi: data-driven characterisation of Uniswap v3 ecosystem & an ideal crypto law for liquidity pools," Papers 2301.13009, arXiv.org, revised Jan 2023.

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