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

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  • Wayne Chen
  • Songwei Chen
  • Preston Rozwood

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.

Suggested Citation

  • Wayne Chen & Songwei Chen & Preston Rozwood, 2023. "Improving Capital Efficiency and Impermanent Loss: Multi-Token Proactive Market Maker," Papers 2309.00632, arXiv.org, revised Jan 2025.
    • Handle: RePEc:arx:papers:2309.00632
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    File URL: http://arxiv.org/pdf/2309.00632
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