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Automated Market Making: the case of Pegged Assets

Author

Listed:
  • Philippe Bergault
  • Louis Bertucci
  • David Bouba
  • Olivier Gu'eant
  • Julien Guilbert

Abstract

In this paper, we introduce a novel framework to model the exchange rate dynamics between two intrinsically linked cryptoassets, such as stablecoins pegged to the same fiat currency or a liquid staking token and its associated native token. Our approach employs multi-level nested Ornstein-Uhlenbeck (OU) processes, for which we derive key properties and develop calibration and filtering techniques. Then, we design an automated market maker (AMM) model specifically tailored for the swapping of closely related cryptoassets. Distinct from existing models, our AMM leverages the unique exchange rate dynamics provided by the multi-level nested OU processes, enabling more precise risk management and enhanced liquidity provision. We validate the model through numerical simulations using real-world data for the USDC/USDT and wstETH/WETH pairs, demonstrating that it consistently yields efficient quotes. This approach offers significant potential to improve liquidity in markets for pegged assets.

Suggested Citation

  • Philippe Bergault & Louis Bertucci & David Bouba & Olivier Gu'eant & Julien Guilbert, 2024. "Automated Market Making: the case of Pegged Assets," Papers 2411.08145, arXiv.org.
    • Handle: RePEc:arx:papers:2411.08145
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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