Dynamic Fee Structure Implementation in Automated Market Makers

Written by NEU Blockchain Discovery Track:

Nicolai Jacobsen, jacobsen.ni@northeastern.edu

Mary Raines Alexander, alexander.mary@northeastern.edu

Read this research paper here.

Abstract

Recent research on Constant Function Market Makers (CFMMs) has shown inconsistent and decreased probabilities of providing as a liquidity provider depositing into Automated Market Makers (AMMs). However, the fees accompanying such trades fail to benefit LPs and are rather manipulated to the advantages of arbitrageurs and lead to impermanent losses. In comparing variable fees to Uniswap’s set fee model, we assumed that oracles provided unbiased information, were completely decentralized, and had no bad actors involved. Therefore, the focus of such research is directed towards the question of fees in regards to LPs’ profits rather than the possible underlying bias of oracles in blockchain. Under such conditions, we analyze and implement a recommendation of a fee model that limits the number of bad actors in its active use by adding a dynamic fee that adjusts in times of varying volatility. Furthermore, the ultimate objective of such a new restructuring of fee analysis is to avoid the arbitrage of prices and return profit to LPs, as an increase in fees during times of volatility can compensate for the impermanent loss experienced by LPs.