Improved Price Oracles: Constant Function Market Makers

Understand

Automated market makers, first popularized by Hanson's logarithmic market scoring rule (or LMSR) for prediction markets, have become important building blocks, called 'primitives,' for decentralized finance.

• A particularly useful primitive is the ability to measure the price of an asset, a problem often known as the pricing oracle problem.
• In this paper, we focus on the analysis of a very large class of automated market makers, called constant function market makers (or CFMMs) which includes existing popular market makers such as Uniswap, Balancer, and Curve, whose yearly transaction volume totals to billions of dollars.
• We give sufficient conditions such that, under fairly general assumptions, agents who interact with these constant function market makers are incentivized to correctly report the price of an asset and that they can do so in a computationally efficient way.