Logo
ScienceStack
Table of Contents
Fetching ...
Sign In

am-AMM: An Auction-Managed Automated Market Maker

Austin Adams, Ciamac C. Moallemi, Sara Reynolds, Dan Robinson

TL;DR

The paper tackles two persistent AMM design challenges: losses to informed arbitrage and optimal fee capture from retail flow. It introduces the am-AMM, a constant-product AMM governed by an on-chain Harberger-leased auction that assigns a pool manager who can set swap fees and collect all pool fees, while rent is paid to liquidity providers. Theoretical analysis compares fixed-fee and auction-managed designs, deriving explicit P&L expressions and showing that, in equilibrium, am-AMM liquidity $L^*$ exceeds the maximum fixed-fee level, with an optimal fee that balances noise-trader revenue against arbitrage costs. It also develops a structural model for arbitrageur excess, establishing conditions under which the manager can monetize small mispricings while mitigating adverse selection, though the design introduces trade-offs such as sandwich attacks and potential centralization, pointing to future work on concentrated liquidity and practical deployment.

Abstract

Automated market makers (AMMs) have emerged as the dominant market mechanism for trading on decentralized exchanges implemented on blockchains. This paper presents a single mechanism that targets two important unsolved problems for AMMs: reducing losses to informed orderflow, and maximizing revenue from uninformed orderflow. The ``auction-managed AMM'' works by running a censorship-resistant onchain auction for the right to temporarily act as ``pool manager'' for a constant-product AMM. The pool manager sets the swap fee rate on the pool, and also receives the accrued fees from swaps. The pool manager can exclusively capture some arbitrage by trading against the pool in response to small price movements, and also can set swap fees incorporating price sensitivity of retail orderflow and adapting to changing market conditions, with the benefits from both ultimately accruing to liquidity providers. Liquidity providers can enter and exit the pool freely in response to changing rent, though they must pay a small fee on withdrawal. We prove that under certain assumptions, this AMM should have higher liquidity in equilibrium than any standard, fixed-fee AMM.

am-AMM: An Auction-Managed Automated Market Maker

TL;DR

The paper tackles two persistent AMM design challenges: losses to informed arbitrage and optimal fee capture from retail flow. It introduces the am-AMM, a constant-product AMM governed by an on-chain Harberger-leased auction that assigns a pool manager who can set swap fees and collect all pool fees, while rent is paid to liquidity providers. Theoretical analysis compares fixed-fee and auction-managed designs, deriving explicit P&L expressions and showing that, in equilibrium, am-AMM liquidity exceeds the maximum fixed-fee level, with an optimal fee that balances noise-trader revenue against arbitrage costs. It also develops a structural model for arbitrageur excess, establishing conditions under which the manager can monetize small mispricings while mitigating adverse selection, though the design introduces trade-offs such as sandwich attacks and potential centralization, pointing to future work on concentrated liquidity and practical deployment.

Abstract

Automated market makers (AMMs) have emerged as the dominant market mechanism for trading on decentralized exchanges implemented on blockchains. This paper presents a single mechanism that targets two important unsolved problems for AMMs: reducing losses to informed orderflow, and maximizing revenue from uninformed orderflow. The ``auction-managed AMM'' works by running a censorship-resistant onchain auction for the right to temporarily act as ``pool manager'' for a constant-product AMM. The pool manager sets the swap fee rate on the pool, and also receives the accrued fees from swaps. The pool manager can exclusively capture some arbitrage by trading against the pool in response to small price movements, and also can set swap fees incorporating price sensitivity of retail orderflow and adapting to changing market conditions, with the benefits from both ultimately accruing to liquidity providers. Liquidity providers can enter and exit the pool freely in response to changing rent, though they must pay a small fee on withdrawal. We prove that under certain assumptions, this AMM should have higher liquidity in equilibrium than any standard, fixed-fee AMM.
Paper Structure (9 sections, 2 theorems, 31 equations)

This paper contains 9 sections, 2 theorems, 31 equations.

Table of Contents

  1. Introduction
  2. Auction Design
  3. Theory
  4. Fixed-Fee AMM Model
  5. Auction-Managed AMM Model
  6. A Structural Model for Arbitrageur Excess
  7. Discussion
  8. Proofs
  9. Withdrawal Fees

Key Result

lemma 1

Given fee $f \in [0,f_{\max}]$, define a liquidity level $L^* > 0$ to be a competitive equilibrium if LPs earn zero profit in excess of the risk free rate, i.e., $\Pi^{\mathsf{LP}}_{\mathsf{ff}}\xspace(f,L^*) = 0$. Then, for any $f \in [0,f_{\max}]$, a unique equilibrium level of liquidity $L^*=L_{\

Theorems & Definitions (8)

  • example 1
  • example 2
  • lemma 1: ff-AMM equilibrium
  • example 3
  • example 4
  • theorem 1: am-AMM equilibrium
  • proof : Proof of \ref{['lem:fixed-fee-eq']}
  • proof : Proof of \ref{['th:liq-dom']}