Improving Capital Efficiency and Impermanent Loss: Multi-Token Proactive Market Maker

TL;DR

This paper introduces a multi-token proactive market maker (MPMM) that improves capital efficiency and reduces impermanent loss in cryptocurrency trading by generalizing existing models and demonstrating advantages through simulations.

Contribution

The paper presents the first multi-token proactive market maker (MPMM), enhancing impermanent loss and capital efficiency over traditional two-token models.

Findings

MPMM outperforms comparable market makers in simulations

Multi-token pools offer significant advantages in efficiency and loss reduction

Generalization of existing market makers to multi-token pools is effective

Abstract

Current approaches to the cryptocurrency automated market makers result in poor impermanent loss and capital efficiency. We analyze the mechanics underlying DODO Exchange's proactive market maker (PMM) to probe for solutions to these issues, leading to our key insight of multi-token trading pools. We explore this paradigm primarily through the construction of a generalization of PMM, the multi-token token proactive market maker (MPMM). We show via simulations that MPMM has better impermanent loss and capital efficiency than comparable market makers under a variety of market scenarios. We also test multi-token generalizations of other common 2-token pool market makers. Overall, this work demonstrates several advantages of multi-token pools and introduces a novel multi-token pool market maker.