The Quantitative Finance Aspects of Automated Market Markers in DeFi
This paper is a chapter of The AMM Book (theammbook.org) which embeds it into a wider and less technical context, including economics, regulations and a description of the related eco system.
Abstract
Automated Market Makers (AMMs) are a class of smart contracts on Ethereum and other blockchains that ”make markets” autonomously. In other words, AMMs stand ready to trade with other market participants that interact with them, at the conditions determined by the AMM. In this this paper, which relies on the existing and growing corpus of literature available, we review and present the key mathematical and quantitative finance aspects that underpin their operations, including the interesting relationship between AMMs and derivatives pricing and hedging. This paper is a chapter of The AMM Book (theammbook.org) which embeds it into a wider and less technical context, including economics, regulations and a description of the related eco system. 1 ar X iv :2 21 2. 10 97 4v 1 [ qfi n. M F] 2 1 D ec 2 02 2