@vbuterin @hexzorro Yet another hidden gem from the economic literature:
https://doi.org/10.1111/j.1468-0262.2004.00531.x
Just quoting some lines from the abstract and concluding remarks:
We show that when the price impact of trades is permanent and time-independent, only linear price-impact functions rule out quasi-arbitrage and thus support viable market prices. When trades have also a temporary price impact, only the permanent price impact must be linear while the temporary one can be of a more general form.
… On the other hand, if the price-impact and price-update functions are independent, then only the price-update function must be linear in trading volume, while the temporary price impact can have various forms without offering quasi-arbitrage opportunities.
The theoretical microstructure literature usually assumes that the change in prices is time-independent and reacts linearly to trading volume. This paper demonstrates that the assumption of time independence of price changes already implies the linearity of the price-update function.
Translation to our case:
- Round trips are the fluctuations and oscillations we are talking about.
- The price manipulation strategy translates to our path-dependence attack.
- I have already explained the temporary (only affects the individual transaction that has also triggered it) and permanent price impact (affects all current and future transactions equally) in my previous post. Furthermore, there exist transient price impacts that will decay over time.
- Altogether, this suggests using the additive linear term in EIP-3416 which does not admit price manipulation, while we can add other terms as temporary price impacts.