by Andreas Park
Research Presentation
Investor
Broker
Venue
Settlement
Exchange
Wholeseller
Darkpool
Internalizer
Venue
Settlement
Investor
On chain
How do you set the price?
Price mechanism:
Prices
invariant \(k=4\times4=16\)
Instantaneous exchange rate:
1 = 1
Contract deposit:
sell 4 DAI for USDC
what price will therefore be quoted?
how many USDC?
a
b
c
d
e
f
g
\(X\)
\(Y\)
normal trade: sell \(x\) \(\to\) get \(y'\)
\(Y-y'\)
\(X+x\)
front-running:
\(Y-y'-y''\)
\(X+2x\)
\(y'>y''~\Rightarrow\)
front-running is intrinsically profitable
Disclaimer:
Market 1
\(Y-y\)
\(X+x\)
\(Y-y'\)
\(X+2x\)
\(X\)
\(Y\)
\(Y-y\)
\(X+x\)
\(Y-y'\)
\(X+2x\)
\(X\)
\(Y\)
Market 2
splitting across time ain't profitable
can't make money from scanning the mem-pool
no intrinsic benefit from market fragmentation
no ping-pong trading
Proposition: For \(x>x^*\), "standard" pricing is "better" for investors than constant product pricing, and for \(x<x^*\) it is the reverse.
splitting across time ain't profitable
can't make money from scanning the mem-pool
no intrinsic benefit from market fragmentation
no ping-pong trading
no front-running if:
front-running profit < 2\(\times\) submitted fee
note, however:
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
youtube.com/user/andreaspark2812/