Automated Market Makers for Cross-chain DeFi and Sharded Blockchains (2309.14290v3)

Abstract: We consider Uniswap-like automated market makers, and, specifically, constant product liquidity pools, operating on blockchains. An important feature of Uniswap is the ability for a trader to carry out a sequence of asset swaps atomically, without other traders changing the prices along the way. This atomic-execution feature is not immediately available in cross-chain or sharded blockchain settings, where different liquidity pools are distributed across different chains or shards. Our contribution is a description and suggested implementation of a new functionality that might be added to individual liquidity pools, the {\em lock-swap}. The lock-swap enables a trader to get a guarantee for the price associated with a swap but only decide later whether or not to carry out the swap. Applied across several liquidity pools, it guarantees the trader assured prices for all swaps in a swap sequence and lets these prices inform the trader's decision about whether or not to carry out the sequence, thus essentially giving the trader the same benefits an atomic execution of the sequence would have provided him. However, in contrast to an atomic execution, our functionality does not prevent other traders from doing swaps during the time where the sequence is planned and possibly carried out. Nor does it prevent liquidity providers from adding or removing liquidity to and from the liquidity pool in that time period.

• The paper introduces a novel execution framework using lock-swap and instant-swap mechanisms to ensure fixed pricing and secure arbitrage in cross-chain AMMs.
• The methodology adapts Uniswap V2-style AMMs to operate in sharded blockchain environments, overcoming challenges like state representation and transaction manipulation.
• The research demonstrates how scalable sharding in blockchain networks can expand the DeFi ecosystem by enhancing liquidity and transaction reliability.

Automated Market Makers for Cross-chain DeFi and Sharded Blockchains

The paper at hand explores a novel execution framework for Automated Market Makers (AMM) that can operate across multiple independent blockchain platforms and sharded blockchain environments. This research highlights the development of a mechanism that potentially enhances the efficiency and economic incentives of decentralized finance (DeFi) through a well-defined protocol ensuring fixed prices across pairwise liquidity pools.

Summary of Contributions

The framework introduces the concept of "lock-swap" and "instant-swap" mechanisms to address the challenges presented by cross-chain decentralized finance (DeFi) and sharded blockchains. These include issues related to state representation and ensuring economic incentives akin to those in Ethereum's AMMs, primarily the arbitrage opportunities resultant from atomic transactions.

1. Cross-chain DeFi: The paper emphasizes the importance of AMMs in DeFi and Web 3.0 adoption, explaining how the development of cross-chain AMMs can expand DeFi ecosystems by handling liquidity pools across different blockchains. The mechanism ensures transaction atomicity and user incentives, which are critical for maintaining the security and functionality of DeFi platforms.
2. Scalable Sharding Models: The paper addresses the equivalence of cross-chain functionality in the most efficient sharding models, where blockchain operations are distributed across shards for improved parallelization. Although achieving true scalable sharding remains challenging, this research exemplifies how AMMs could function across such environments using a sharding-compatible approach.
3. Lock-swap Mechanism: The lock-swap mechanism guarantees fixed prices for a swap, creating a virtual liquidity pool that temporarily provides fixed exchange rates for users executing the swap first. This mechanism mimics the sequential dependency inherent in Ethereum's AMM, while allowing parallel transactions. Users initiating a lock-swap have the advantage of stable exchange rates in subsequent transactions.
4. Addressing Frontrunning Issues: The framework also proposes a solution to frontrunning and transaction manipulation concerns in DeFi, notably present in Ethereum and similar ecosystems. By maintaining transaction secrecy until execution using zero-knowledge proofs, the model aims to ensure fair trading conditions.

Strong Results and Claims

The paper boldly claims a method to adjust Uniswap V2-style AMMs to function in both independent blockchains and sharded networks while preserving core DeFi desirable traits such as arbitrage and economic incentivization. The introduction of lock-swaps, which enable asynchronous and concurrent execution without forfeiting sequential guarantees, represents a strong argument for the stated cross-chain and sharding capabilities.

Implications and Future Developments

Practically, the research could lead to broader AMM adoption beyond the blockchain ecosystem. Traditional finance institutions may find AMMs more appealing if their inherent "free" arbitrage opportunities are structured favorably within regulatory frameworks. Theoretically, solving blockchain scalability issues with efficient cross-chain and sharded AMM operations could significantly dilute the current limitations of blockchain networks.

For future developments, integrating privacy-preserving mechanisms with lock-swaps could further strengthen the marketplace against manipulation while fostering faster adoption rates. Exploration into more robust frameworks that handle more complex multi-chain environments while maintaining economic and technical security could be another research trajectory.

Overall, this work lays crucial foundations for future DeFi applications, opening exploratory paths into scaling these financial protocols across various blockchain architectures without the limitations anchored to specific platforms.