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Financial economics of automated market makers

In: The Elgar Companion to Decentralized Finance, Digital Assets, and Blockchain Technologies

Author

Listed:
  • Alexander Brauneis
  • Roland Mestel
  • Martin Rauch

Abstract

With the inception of Bitcoin in 2009 as the world’s first cryptocurrency, a new era of trustless, censorship resistant and decentralized transfer of assets has commenced. Smart contract capable blockchains like Ethereum allow for the creation of computer code which is stored on the blockchain. The code executes tasks in a transparent and immutable way, without central authorities or third party middlemen. Automated market maker (AMM) liquidity pools are a groundbreaking application built on top of smart contract blockchains, first introduced in late 2018. AMMs facilitate the non-custodial exchange of arbitrary assets that can be represented on a blockchain, or tokenized. This chapter sheds light on the operating principles of AMMs and highlights variants of AMMs and notions of liquidity provision, slippage, and impermanent loss.

Suggested Citation

  • Alexander Brauneis & Roland Mestel & Martin Rauch, 2024. "Financial economics of automated market makers," Chapters, in: Henrik Cronqvist & Desiree-Jessica Pely (ed.), The Elgar Companion to Decentralized Finance, Digital Assets, and Blockchain Technologies, chapter 9, pages 167-190, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:22115_9
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    File URL: https://www.elgaronline.com/doi/10.4337/9781035307760.00014
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