Analysis of the RMM-01 Market Maker

Abstract: Constant function market makers(CFMMS) are a popular market design for decentralized exchanges(DEX). Liquidity providers(LPs) supply the CFMMs with assets to enable trades. In exchange for providing this liquidity, an LP receives a token that replicates a payoff determined by the trading function used by the CFMM. In this paper, we study a time-dependent CFMM called RMM-01. The trading function for RMM-01 is chosen such that LPs recover the payoff of a Black--Scholes priced covered call. First, we introduce the general framework for CFMMs. After, we analyze the pricing properties of RMM-01. This includes the cost of price manipulation and the corresponding implications on arbitrage. Our first primary contribution is from examining the time-varying price properties of RMM-01 and determining parameter bounds when RMM-01 has a more stable price than Uniswap. Finally, we discuss combining lending protocols with RMM-01 to achieve other option payoffs which is our other primary contribution.