Pricing Personalized Preferences for Privacy Protection in Constant Function Market Makers (2309.14652v1)

Abstract: Constant function market makers (CFMMs) are a popular decentralized exchange mechanism and have recently been the subject of much research, but major CFMMs give traders no privacy. Prior work proposes randomly splitting and shuffling trades to give some privacy to all users [Chitra et al. 2022], or adding noise to the market state after each trade and charging a fixed `privacy fee' to all traders [Frongillo and Waggoner 2018]. In contrast, we propose a noisy CFMM mechanism where users specify personal privacy requirements and pay personalized fees. We show that the noise added for privacy protection creates additional arbitrage opportunities. We call a mechanism priceable if there exists a privacy fee that always matches the additional arbitrage loss in expectation. We show that a mechanism is priceable if and only if the noise added is zero-mean in the asset amount. We also show that priceability and setting the right fee are necessary for a mechanism to be truthful, and that this fee is inversely proportional to the CFMM's liquidity.