Presentation and Publication: Loss and Slippage in Networks of Automated Market Makers

TL;DR

This paper analyzes how the formulas of automated market makers influence costs and incentives for traders and liquidity providers, revealing conservation laws and effects of network composition on these costs.

Contribution

It introduces formal definitions of slippage, divergence loss, and load, and studies their behavior and conservation laws in networks of AMMs.

Findings

Costs obey conservation laws and cannot be fully eliminated.

Network composition affects the distribution of costs among participants.

Formal framework for analyzing costs in AMM networks.

Abstract

Automated market makers (AMMs) are smart contracts that automatically trade electronic assets according to a mathematical formula. This paper investigates how an AMM's formula affects the interests of liquidity providers, who endow the AMM with assets, and traders, who exchange one asset for another at the AMM's rates. *Linear slippage* measures how a trade's size affects the trader's return, *angular slippage* measures how a trade's size affects the subsequent market price, *divergence loss* measures the opportunity cost of providers' investments, and *load* balances the costs to traders and providers. We give formal definitions for these costs, show that they obey certain conservation laws: these costs can be shifted around but never fully eliminated. We analyze how these costs behave under *composition*, when simple individual AMMs are linked to form more complex networks of AMMs.