Balance on slippage and arbitrage opportunities of automated market makers for cryptocurrency exchange liquidity

Several thefts of funds and from exchanges have raised concerns about the emergence of decentralized exchanges (DEX). However, the existing completely DEX mechanisms are inefficient, with high transaction costs hindering liquidity maintenance. The exchange market stakeholders include investors, customers, arbitrageurs, and the cryptocurrency exchange system, which perceives risks and opportunities differently amidst the high volatility of the cryptocurrency market. This study balances slippage stability and arbitrage opportunities for cryptocurrency DEX. Most of the automated market maker mechanisms in existing exchanges adopt the inverse formula to eliminate the requirement for sellers and buyers to agree on prices. Several existing market maker schemes, such as the constant mean and constant product market maker, are compared. This work discusses the merits, drawbacks, potential opportunities, and challenges associated with the proposed virtual extension reverse proportion mechanism. We explore the exchange efficiency and methods to balance stable slippage for customers, arbitrage opportunities for arbitrageurs, and investment opportunity costs for the investors. The effect of the proposed mechanism on the investors is also evaluated. By using the proposed mechanism to achieve (1) the operational efficiency with a smaller volume of cryptocurrencies invested, (2) the stability with small rate of price slippage for the customers, (3) the controlled slippage price gives the arbitrage opportunities to keep liquidity, and (4) the low investment opportunity cost for the investors. Both conditions of the static and dynamic market prices are considered. A serial of experiment results presented that the proposed schemes achieve the goals and provide more stability than the existing schemes.