4 comments on “Automated Market Makers and Liquidity

  1. I can’t tell whether this algorithm limits the exposure of the market maker. Hanson’s logarithmic market maker guarantees that a fixed investment will provide liquidity over the entire range of prices. Zocalo’s implementation of a combined logarithmic rule with a book order market provides liquidity when the market is thin, and the book orders can thicken the market when there is more interest.

  2. I believe the market maker’s exposure would be bounded in a way that’s fairly similar to Hanson’s algorithm, but I haven’t tried to prove it.

    How much have books orders typically increased the liquidity with Zocalo?

    Under my proposed algorithm, liquidity after 10 trades can be nearly 10 times the initial liquidity if the market seems to converge on a price that is near the starting price.

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