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This document presents a framework for analyzing the optimal liquidity provision strategy of an automated market maker (AMM). The authors develop a general model where an AMM chooses a demand curve specifying the quantity of an asset to hold at each price. Traders submit price bids, and the AMM determines allocations and payments to maximize profits while incentivizing truthful bidding. The optimal demand curve generally has a "bid-ask spread" caused by both adverse selection from informed traders and monop

Author

chitra lima

Language

EN