Complexity-Approximation Trade-offs in Exchange Mechanisms: AMMs vs. LOBs

This paper presents a general framework for the design and analysis of exchange mechanisms between two assets that unifies and enables comparisons between the two dominant paradigms for exchange, constant function market markers (CFMMs) and limit order books (LOBs). In our framework, each liquidity provider (LP) submits to the exchange a downward-sloping demand curve, specifying the quantity of the risky asset it wishes to hold at each price; the exchange buys and sells the risky asset so as to ...