UAMM: Price-oracle based Automated Market Maker
Daniel Jiwoong Im, Alexander Kondratskiy, Vincent Harvey, Hsuan-Wei Fu
TL;DR
This work tackles arbitrage and impermanent loss in traditional AMMs by introducing UAMM, a price-oracle based Automated Market Maker. By integrating external fair prices with internal pool states and a target balance $TB$, it decomposes prices into a fair component and an output slippage via a function $USX$, preserving a constant-product-like dynamic for slippage. The framework formalizes Add, Remove, and Swap transactions, proving properties such as additivity, reversibility, and output-boundedness, and demonstrates that arbitrage opportunities vanish when external prices are efficient. The approach offers improved liquidity-provider risk management and potential zero-arbitrage conditions, contributing a principled cross-market pricing mechanism for DEXs.
Abstract
Automated market makers (AMMs) are pricing mechanisms utilized by decentralized exchanges (DEX). Traditional AMM approaches are constrained by pricing solely based on their own liquidity pool, without consideration of external markets or risk management for liquidity providers. In this paper, we propose a new approach known as UBET AMM (UAMM), which calculates prices by considering external market prices and the impermanent loss of the liquidity pool. Despite relying on external market prices, our method maintains the desired properties of a constant product curve when computing slippages. The key element of UAMM is determining the appropriate slippage amount based on the desired target balance, which encourages the liquidity pool to minimize impermanent loss. We demonstrate that our approach eliminates arbitrage opportunities when external market prices are efficient.