ICES Experimental Economics Brown Bag Lecture

Analyzing Arbitrage Behavior in Automated Market Makers

Thursday, March 24, 2022 12:00 PM to 1:00 PM EDT
Online Location, Zoom Meeting

ICES Experimental Economics Brown Bag Lecture

The Interdisciplinary Center for Economic Science (ICES) presents an ICES Brown Bag Lecture featuring:

Sarah Sylvester

George Mason University

Analyzing Arbitrage Behavior in Automated Market Makers

 

Please contact ICES Office Manager (sbahabib@gmu.edu) for Zoom link.

 

Abstract

Automated Market Makers (AMMs) are a relatively new mechanism that allows people to trade cryptocurrencies instantly. Unlike typical trades that utilize order-books, AMMs do not need buyers and sellers to match for exchanges, rather, they use a pre-determined formula to offer prices for different digital tokens. AMMs have recently gained in popularity using the blockchain ecosystem, with the value of cryptocurrencies locked in decentralized finance reaching USD 89.23 billion; but AMMs remain relatively unstudied by economists (DeFi Pulse). This paper provides an introductory analysis of AMMs through agent-based modeling, using the mTree framework. With computer simulations, different behaviors of agents using AMMs and different types of AMMs are analyzed. Utilizing a micro-economic system framework, we model a decentralized finance environment, blockchain and AMM institutions, and agents who offer trades. We specifically look at arbitrage agents, a specific trader-type who uses token price differences in various markets to make low-risk profits and equilibrate the prices of cryptocurrencies across markets. Since arbitrage agents have not been studied through simulations, we provide the first analysis of arbitrage strategies and explore how their behavior can affect and AMM’s efficiency.

 

For more information about the Brown Bag Lectures, please visit the Brown Bag Schedule homepage.

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