Technology Category
Multiagent Systems: Mechanism DesignGame Theory and Economic Paradigms: Mechanism DesignCognitive Modeling & Cognitive Systems: Conceptual Inference and Reasoning
A Microstructure Analysis of Coupling in CFMMs
🤖 AI Summary
This paper investigates price transmission mechanisms in coupled Constant Function Market Maker (CFMM) markets within decentralized finance, focusing on nonlinear price linkages and basket inflation/deflation arising when intermediate assets serve as cross-market oracles. We model a two-CFMM intermediate market structure—comprising constant-product AMMs—and integrate market microstructure theory to quantify the relative impacts of price drift, trade size, and market depth on inflation dynamics. Our key contribution is uncovering a path-dependent, micro-level transmission mechanism and proposing an interpretable analytical framework that systematically characterizes oracle-driven price spillovers and their structural impact on the value of asset baskets priced in risk-free assets. The results provide theoretical foundations and quantitative tools for CFMM coupling design, oracle risk modeling, and stability optimization in decentralized markets.
Technology Category
Application Category
📝 Abstract
The programmable and composable nature of smart contract protocols has enabled the emergence of novel market structures and asset classes that are architecturally frictional to implement in traditional financial paradigms. This fluidity has produced an understudied class of market dynamics, particularly in coupled markets where one market serves as an oracle for the other. In such market structures, purchases or liquidations through the intermediate asset create coupled price action between the intermediate and final assets; leading to basket inflation or deflation when denominated in the riskless asset. This paper examines the microstructure of this inflationary dynamic given two constant function market makers (CFMMs) as the intermediate market structures; attempting to quantify their contributions to the former relative to familiar pool metrics such as price drift, trade size, and market depth. Further, a concrete case study is developed, where both markets are constant product markets. The intention is to shed light on the market design process within such coupled environments.
Problem
Research questions and friction points this paper is trying to address.
Analyzing coupled price dynamics in CFMM markets
Quantifying inflationary effects from intermediate asset interactions
Studying microstructure impacts on oracle-based market structures
Innovation
Methods, ideas, or system contributions that make the work stand out.
Analyzes microstructure of coupled CFMM markets
Quantifies inflation dynamics using pool metrics
Develops case study for constant product markets
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