Automated Market Maker on the XRP Ledger

Decentralized Finance (DeFi) has emerged as a transformative force in the financial sector, with Automated Market Makers (AMMs) playing a crucial role in facilitating asset exchange and liquidity provision. However, most AMMs operate on the Ethereum blockchain and face challenges such as high transa...

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Bibliographic Details
Published inarXiv.org
Main Authors Dahi, Firas, Walter Hernandez Cruz, Feng, Yebo, Xu, Jiahua, Malhotra, Aanchal, Tasca, Paolo
Format Paper
LanguageEnglish
Published Ithaca Cornell University Library, arXiv.org 10.06.2024
Subjects
Automation
Blockchain
Liquidity
Loss reduction
Synchronism
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Summary:Decentralized Finance (DeFi) has emerged as a transformative force in the financial sector, with Automated Market Makers (AMMs) playing a crucial role in facilitating asset exchange and liquidity provision. However, most AMMs operate on the Ethereum blockchain and face challenges such as high transaction fees and price synchronization issues mainly due to Ethereum scalability issues. This paper addresses these limitations by investigating the performance of an Automated Market Maker (AMM) integrated at the protocol level of the XRP Ledger. Using game-theoretic simulations, we compared the XRPL-AMM to a Generic CPMM-based AMM (G-AMM) on Ethereum, akin to established players like Uniswap's V2 AMM implementation. The results demonstrate that the XRPL-AMM outperforms in terms of price synchronization with external markets, lower slippage, reduced impermanent loss, and improved returns for liquidity providers, particularly under volatile market conditions. The unique Continuous Auction Mechanism (CAM) of the XRPL-AMM further enhances its efficiency by incentivizing beneficial arbitrage. These findings highlight the potential of protocol-level AMM integration. To the best of our knowledge, the XRPL-AMM is one of the first AMMs built directly at the protocol level of a blockchain. Therefore, this inaugural study ventures into the unexplored domain of evaluating AMMs with protocol-level integration compared to traditional smart contracts implementations.
ISSN:2331-8422