2023/06/20 by Richard Dewey, Dewey, Richard, Craig Newbold +1
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Cryptography and Security (cs.CR) #Economic theories and models #FOS: Computer and information sciences #FOS: Economics and business #Pricing of Securities (q-fin.PR) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.2306.11580
openalex publication_date 2023/06/20 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We investigate the most common type of blockchain-based decentralized exchange, which are known as constant function market makers (CFMMs). We examine the the market microstructure around CFMMs and present a model for valuing the liquidity provider (LP) mechanism and estimating the value of the associated derivatives. We develop a model with two types of traders that have different information and contribute methods for simulating the behavior of each trader and accounting for trade PnL. We also develop ideas around the equilibrium distribution of fair price conditional on the arrival of traders. Finally, we show how these findings might be used to think about parameters for alternative CFMMs.