SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) protocols

As an integral part of the Decentralized Finance (DeFi) ecosystem, Automated Market Maker (AMM) based Decentralized Exchanges (DEXs) have gained massive traction with the revived interest in blockchain and distributed ledger technology in general. Most prominently, the top six AMMs -- Uniswap, Balancer, Curve, DODO, Bancor and Sushiswap -- hold in aggregate 15 billion USD worth of crypto-assets as of March 2021. Instead of matching the buy and sell sides, AMMs employ a peer-to-pool method and determine asset price algorithmically through a so-called conservation function. Compared to centralized exchanges, AMMs exhibit the apparent advantage of decentralization, automation and continuous liquidity. Nonetheless, AMMs typically feature drawbacks such as high slippage for traders and divergence loss for liquidity providers. This work establishes a general AMM framework describing the economics and formalizing the system's state-space representation. We employ our framework to systematically compare the top AMM protocols' mechanics, deriving their slippage and divergence loss functions. We further discuss security and privacy concerns associated with AMM DEXs, and conduct a comprehensive literature review on related work covering both DeFi and conventional market microstructure.