SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) Protocols
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by
Jiahua Xu, Krzysztof Paruch, Simon Cousaert, Yebo Feng
2021
Abstract
As an integral part of the decentralized finance (DeFi) ecosystem,
decentralized exchanges (DEX) with automated market maker (AMM) protocols have
gained massive traction with the recently revived interest in blockchain and
distributed ledger technology (DLT) in general. Instead of matching the buy and
sell sides, AMMs employ a peer-to-pool method and determine asset price
algorithmically through a so-called conservation function. To facilitate the
improvement and development of AMM-based DEX, we create the first
systematization of knowledge in this area. We first establish a general AMM
framework describing the economics and formalizing the system's state-space
representation. We then employ our framework to systematically compare the top
AMM protocols' mechanics, illustrating their conservation functions, as well as
slippage and divergence loss functions. We further discuss security and privacy
concerns, how they are enabled by AMM-based DEX's inherent properties, and
explore mitigating solutions. Finally, we conduct a comprehensive literature
review on related work covering both DeFi and conventional market
microstructure.
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