Uniform-Price Mechanism Design for Automated Market Makers

Automated market makers (AMMs) are central to decentralized exchanges, but their reserve curves make mechanism design different from classical double auctions. We study a batch double auction with buyers, sellers, and a liquidity-nondecreasing AMM: post-trade reserves must have weakly larger product than the initial reserves. Each user has two-dimensional private information: a unit value and a demand or supply quantity. User trades clear at one uniform price subject to AMM feasibility. The objective is user-side trading volume, benchmarked against the optimal feasible individually rational (IR) uniform-price allocation. We give a randomized uniform-price mechanism based on binary quantity buckets. It randomly chooses one of three clearing modes: peer-to-peer matching, AMM sales to buyers, and seller sales to the AMM. Every deterministic realization of the mechanism is ex-post feasible and satisfies IR and weak quantity incentive compatibility: conditional on any quantity report, truthful unit-value reporting is dominant whenever it gives a non-negative utility, no unit-value deviation gives a positive utility if the truthful one doesn’t, and users cannot benefit by under-reporting the quantity together with their truthful unit value. Let $V^{\ast }$ be the optimal feasible IR uniform-price volume without incentive constraints, and let $\gamma =\bar{q}\mathrm{/}\underset{‾}{q}$, where $\bar{q}$ and $\underset{‾}{q}$ are the quantity-domain bounds. For $\gamma \ge 1$, the mechanism achieves an expected trading volume of $\mathrm{\Omega }(1\mathrm{/}(1+\log \gamma {)}^2)V^{\ast }-O(\bar{q})\mathrm{.}$ We also show that full incentive compatibility over the two-dimensional type space forces a worst-case approximation ratio of $O(1\mathrm{/}\gamma )$ at every prescribed initial reserve ratio, even when both AMM reserves are scaled by an arbitrarily large common factor and the optimal volume $V^{\ast }$ is arbitrarily large relative to $\bar{q}$.