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Dynamic Curves for Decentralized Autonomous Cryptocurrency Exchanges

Authors Bhaskar Krishnamachari, Qi Feng, Eugenio Grippo

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Bhaskar Krishnamachari
  • Viterbi School of Engineering, University of Southern California, Los Angeles, CA, USA
Qi Feng
  • Viterbi School of Engineering, University of Southern California, Los Angeles, CA, USA
Eugenio Grippo
  • Viterbi School of Engineering, University of Southern California, Los Angeles, CA, USA

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Bhaskar Krishnamachari, Qi Feng, and Eugenio Grippo. Dynamic Curves for Decentralized Autonomous Cryptocurrency Exchanges. In 4th International Symposium on Foundations and Applications of Blockchain 2021 (FAB 2021). Open Access Series in Informatics (OASIcs), Volume 92, pp. 5:1-5:14, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2021)
https://doi.org/10.4230/OASIcs.FAB.2021.5

Abstract

One of the exciting recent developments in decentralized finance (DeFi) has been the development of decentralized cryptocurrency exchanges that can autonomously handle conversion between different cryptocurrencies. Decentralized exchange protocols such as Uniswap, Curve and other types of Automated Market Makers (AMMs) maintain a liquidity pool (LP) of two or more assets constrained to maintain at all times a mathematical relation to each other, defined by a given function or curve. Examples of such functions are the constant-sum and constant-product AMMs. Existing systems however suffer from several challenges. They require external arbitrageurs to restore the price of tokens in the pool to match the market price. Such activities can potentially drain resources from the liquidity pool. In particular dramatic market price changes can result in low liquidity with respect to one or more of the assets and reduce the total value of the LP. We propose in this work a new approach to constructing the AMM by proposing the idea of dynamic curves. It utilizes input from a market price oracle to modify the mathematical relationship between the assets so that the pool price continuously and automatically adjusts to be identical to the market price. This approach eliminates arbitrage opportunities and, as we show through simulations, maintains liquidity in the LP for all assets and the total value of the LP over a wide range of market prices.

Subject Classification

ACM Subject Classification
  • Applied computing → Online banking
Keywords
  • Decentralized Exchange
  • Automated Market Maker
  • Decentralized Finance
  • Dynamic Curves

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References

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