mUTxO: CPMM Design with Native Margin Trading and Bitcoin Interoperability

Abstract

Constant Product Market Maker (CPMM) designs are the cornerstone of decentralized exchange, yet they inherently suffer from low capital efficiency and suboptimal liquidity provider (LP) incentives. In this work, we propose a novel extension of the classical CPMM model that utilizes idle liquidity within the pool to enable decentralized margin trading. We introduce a UTXO-based state management system to encode and track active margin positions, referred to as mUTXOs. We formally prove that this model closely mirrors the behavior of traditional CPMMs. Furthermore, we demonstrate how this architecture composes with standard Bitcoin interoperability solutions to facilitate cross-chain exposure, preserving a Bitcoin-native fee structure for a seamless user experience.