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2020

Automated Market Makers for Decentralized Finance (DeFi)

Wang, Yongge

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This paper compares mathematical models for automated market makers including logarithmic market scoring rule (LMSR), liquidity sensitive LMSR (LS-LMSR), constant product/mean/sum, and others.

It is shown that though LMSR may not be a good model for Decentralized Finance (DeFi) applications, LS-LMSR has several advantages over constant product/mean based automated market makers.
However, LS-LMSR requires complicated computation (i.e., logarithm and exponentiation) and the cost function curve is concave.
In certain DeFi applications, it is preferred to have computationally efficient cost functions with convex curves to conform with the principle of supply and demand.

Automated Market Makers for Decentralized Finance (DeFi) · Around

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Rational decisions
I.J. Good · 1952
Earlier work this paper cites.
Efficient capital markets: A review of theory and empirical work
E.F. Fama · 1970
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Combinatorial information market design
R. Hanson · 2003
Earlier work this paper cites.
Logarithmic markets coring rules for modular combinatorial information aggregation
R. Hanson · 2007
Earlier work this paper cites.
A practical liquidity-sensitive automated market maker
A. Othman, D.M. Pennock, D.M. Reeves, and T. Sandholm · 2013
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