Authors: Marc Sabate-Vidales, D. Siska

Venue: Defi (2022)

Abstract: We are interested in how the relationship between the fee in a constant product market (CPM) and the volatility of the swapped pair on other liquid exchanges influences the losses/gains of the liquidity providers. We review three classical market making models: Glosten and Milgrom, Kyle and Grossman and Miller and note that these very different models there is always a relationship between volatility and how rational market makers set prices. Motivated by this we set up an agent based model to explore this in the context of