UAMM: Price-oracle based Automated Market Maker

TL;DR

UAMM introduces an innovative AMM that incorporates external market prices and impermanent loss considerations to improve pricing accuracy and reduce arbitrage, maintaining constant product properties and optimizing liquidity provider outcomes.

Contribution

The paper presents UBET AMM (UAMM), a novel pricing mechanism that integrates external market data and impermanent loss management into AMMs, enhancing efficiency and stability.

Findings

UAMM effectively eliminates arbitrage opportunities in efficient markets.

The approach maintains constant product curve properties despite external price integration.

UAMM encourages liquidity pools to minimize impermanent loss.

Abstract

Automated market makers (AMMs) are pricing mechanisms utilized by decentralized exchanges (DEX). Traditional AMM approaches are constrained by pricing solely based on their own liquidity pool, without consideration of external markets or risk management for liquidity providers. In this paper, we propose a new approach known as UBET AMM (UAMM), which calculates prices by considering external market prices and the impermanent loss of the liquidity pool. Despite relying on external market prices, our method maintains the desired properties of a constant product curve when computing slippages. The key element of UAMM is determining the appropriate slippage amount based on the desired target balance, which encourages the liquidity pool to minimize impermanent loss. We demonstrate that our approach eliminates arbitrage opportunities when external market prices are efficient.