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Extended Abstract: The Effect of Trading Fees on Arbitrage Profits in Automated Market Makers

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Financial Cryptography and Data Security. FC 2023 International Workshops (FC 2023)

Part of the book series: Lecture Notes in Computer Science ((LNCS,volume 13953))

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Abstract

We consider the impact of trading fees on the profits of arbitrageurs trading against an automated marker marker (AMM) or, equivalently, on the adverse selection incurred by liquidity providers due to arbitrage. We extend the model of Milionis et al. [1] for a general class of two asset AMMs to both introduce fees and discrete Poisson block generation times. In our setting, we are able to compute the expected instantaneous rate of arbitrage profit in closed form. When the fees are low, in the fast block asymptotic regime, the impact of fees takes a particularly simple form: fees simply scale down arbitrage profits by the fraction of time that an arriving arbitrageur finds a profitable trade.

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Reference

  1. Milionis, J., Moallemi, C.C., Roughgarden, T., Zhang, A.L.: Quantifying loss in automated market makers. In: Proceedings of the 2022 ACM CCS Workshop on Decentralized Finance and Security, pp. 71–74. Association for Computing Machinery, New York, USA (2022). https://doi.org/10.1145/3560832.3563441

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Acknowledgment

The first author is supported in part by NSF awards CNS-2212745, CCF-2212233, DMS-2134059, and CCF-1763970. The second author is supported by the Briger Family Digital Finance Lab at Columbia Business School. The third author’s research at Columbia University is supported in part by NSF awards CNS-2212745, and CCF-2006737.

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Authors and Affiliations

  1. Department of Computer Science, Columbia University, New York, NY, 10027, USA

    Jason Milionis & Tim Roughgarden

  2. Graduate School of Business, Columbia University, New York, NY, 10027, USA

    Ciamac C. Moallemi

  3. a16z Crypto, New York, NY, 10010, USA

    Tim Roughgarden

Authors
  1. Jason Milionis
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  2. Ciamac C. Moallemi
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  3. Tim Roughgarden
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Corresponding authors

Correspondence to Jason Milionis , Ciamac C. Moallemi or Tim Roughgarden .

Editor information

Editors and Affiliations

  1. Western University, London, ON, Canada

    Aleksander Essex

  2. Georgetown University, Washington, DC, USA

    Shin'ichiro Matsuo

  3. IT University of Copenhagen, Copenhagen, Denmark

    Oksana Kulyk

  4. Imperial College London, London, UK

    Lewis Gudgeon

  5. Imperial College London, London, UK

    Ariah Klages-Mundt

  6. Imperial College London, London, UK

    Daniel Perez

  7. Imperial College London, London, UK

    Sam Werner

  8. Stirling University, Stirling, UK

    Andrea Bracciali

  9. University College London, London, UK

    Geoff Goodell

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© 2024 International Financial Cryptography Association

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Cite this paper

Milionis, J., Moallemi, C.C., Roughgarden, T. (2024). Extended Abstract: The Effect of Trading Fees on Arbitrage Profits in Automated Market Makers. In: Essex, A., et al. Financial Cryptography and Data Security. FC 2023 International Workshops. FC 2023. Lecture Notes in Computer Science, vol 13953. Springer, Cham. https://doi.org/10.1007/978-3-031-48806-1_17

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  • DOI: https://doi.org/10.1007/978-3-031-48806-1_17

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  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-031-48805-4

  • Online ISBN: 978-3-031-48806-1

  • eBook Packages: Computer ScienceComputer Science (R0)

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