Research
Publications
Automated Market Makers and the optimal implementation for CBDCs (in spanish)
Central Bank of Argentina (Second Prize, 2023 Annual Dissertation Award for Economic Research “Dr. Raúl Prebisch”)
Abstract: The creation of Bitcoin in 2008 demonstrated the possibility of creating virtual money backed solely by trust in the issuance algorithm, rather than a central monetary authority. Additionally, blockchain technology for transaction recording gained popularity and sparked innovations in its application. The most significant of these innovations came with Ethereum in 2014, a blockchain that not only supported its cryptocurrency (Ether) but also enabled the creation of smart contracts. Smart contracts on Ethereum quickly found applications in the development of stable cryptocurrencies, or Stablecoins, and later in decentralized markets for cryptocurrency trading. These decentralized markets faced the challenge of being unable to replicate the mechanisms used in traditional financial systems, particularly the order book, and had to turn to algorithms to find solutions. From this search emerged Automated Market Makers (AMMs), capable of providing liquidity at a price determined algorithmically. Subsequently, various types of AMMs were designed, each with distinct properties, in an attempt to provide the definitive solution for anonymous trading in systems without a central authority. Alongside the growth and mainstream adoption of cryptocurrencies and their blockchain-based applications, governments around the world, particularly their central banks, began exploring the possibility of basing their economies on so-called Central Bank Digital Currencies (CBDCs). This work aims to outline the main types of algorithms put into operation, highlight some of their properties, and finally propose the use of a specific implementation for central banks’ virtual currencies that allows for a certain degree of freedom in determining monetary policy, particularly with regard to exchange rate policy.