Matching, Routing & Arbitrage in AMMs

Definitions

Matching: The process of finding the optimal way to execute a trade within a single pool.

Routing: Extends matching by considering trades that span multiple pools and involve three or more tokens

Historical Context:

One of the most notable events in AMM history is SushiSwap’s vampire attack on Uniswap. By cloning Uniswap v2 pools and offering identical conditions, SushiSwap incentivized liquidity migration from Uniswap. This situation created a routing challenge: traders needed to decide how much to trade through Uniswap versus SushiSwap. Platforms like 1inch optimize this process by determining the best path for trades, especially significant for larger transactions where gas costs are negligible.

Insights:

• Insight 1: All AMMs available on a single network (like Ethereum) form a "World AMM" for that network. This is due to the interconnected nature of these AMMs, which together provide a comprehensive trading environment.

• Insight 2: Any single AMM can be broken down into an aggregation of individual user positions, necessitating a routing algorithm to manage trades within these positions efficiently.

• Insight 3: Pre-Carbon AMMs simplify routing by bucketing user positions, which impacts user experience. Carbon, on the other hand, is designed to offer personalized user positions while maintaining efficient routing.

Carbon's Unique Approach:

Carbon’s design includes personalized user positions along with a routing algorithm that maintains high efficiency. This approach aims to enhance the user experience by providing more tailored liquidity management. The routing mechanisms of Carbon can be explored through the open-source Carbon Simulator available on GitHub.

Arbitrage:

The process of identifying and exploiting price imbalances within and between pools to make a profit.

Relationship with Routing:

While routing focuses on executing trades efficiently, arbitrage involves finding profitable opportunities by comparing potential routes and executing reverse trades across different markets.

Understanding these concepts is essential for optimizing trade execution and maximizing profitability within AMMs. Carbon’s innovative approach seeks to provide a more personalized and efficient trading experience, addressing some of the key challenges faced by traditional AMM designs.