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Intermediating DFMM Asset (IDA)

Author

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  • Arman Abgaryan
  • Utkarsh Sharma

Abstract

The Dynamic Function Market Maker (DFMM) introduced a fully automated framework for operating a multi-asset market, wherein an algorithmic accounting asset was used to connect different liquidity pools and ensure efficient rebalancing of risks, and internal accounting processes. In the DFMM design, this asset was not tradaeble; however, in this work, we explore the characteristics of this asset, if it were to be made tradeable. Named the Intermediating DFMM Asset (IDA), this asset serves as a unit of account in cross-chain finance, functioning as an intermediating asset for predictable budgeting, and efficient multichain transfers and settlements. Harnessing its robust liquidity as the key counterpart asset in DFMM, it achieves capital efficiency through the strategic repurposing of its asset base, while simultaneously mitigating risk via the dynamic optimisation of its multicollateral foundation. We outline key characteristics of the proposed asset, unique risk mitigation aspects enabled by the adopting AMM (DFMM), and control levers enabling the protocol's tactical asset and liability management toolkit to harmonise the asset's objectives with its real-world realisation, through a novel prudential market operation to incentivise productive use of a finite asset and dynamic AMM fee to ensure alignment of behaviours. The proposed design has the potential to harmonise the interests of diverse market participants, leading to synergetic reactions to informational flow, aiding IDA protocol in achieving its objectives.

Suggested Citation

  • Arman Abgaryan & Utkarsh Sharma, 2023. "Intermediating DFMM Asset (IDA)," Papers 2311.05234, arXiv.org.
    • Handle: RePEc:arx:papers:2311.05234
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    References listed on IDEAS

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    1. Arman Abgaryan & Utkarsh Sharma, 2023. "Dynamic Function Market Maker," Papers 2307.13624, arXiv.org.
    2. Briola, Antonio & Vidal-Tomás, David & Wang, Yuanrong & Aste, Tomaso, 2023. "Anatomy of a Stablecoin’s failure: The Terra-Luna case," Finance Research Letters, Elsevier, vol. 51(C).
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