Computer Science > Computer Science and Game Theory
[Submitted on 1 Apr 2022 (v1), last revised 25 Aug 2022 (this version, v2)]
Title:Differential Liquidity Provision in Uniswap v3 and Implications for Contract Design
View PDFAbstract:Decentralized exchanges (DEXs) provide a means for users to trade pairs of assets on-chain without the need for a trusted third party to effectuate a trade. Amongst these, constant function market maker DEXs such as Uniswap handle the most volume of trades between ERC-20 tokens. With the introduction of Uniswap v3, liquidity providers can differentially allocate liquidity to trades that occur within specific price intervals. In this paper, we formalize the profit and loss that liquidity providers can earn when providing specific liquidity allocations to a v3 contract. We give a convex stochastic optimization problem for computing optimal liquidity allocation for a liquidity provider who holds a belief on how prices will evolve over time and use this to study the design question regarding how v3 contracts should partition the price space for permissible liquidity allocations. Our results show that making a greater diversity of price-space partitions available to a contract designer can simultaneously benefit both liquidity providers and traders.
Submission history
From: Francisco Javier Marmolejo-Cossío [view email][v1] Fri, 1 Apr 2022 14:22:40 UTC (6,771 KB)
[v2] Thu, 25 Aug 2022 21:02:28 UTC (11,050 KB)
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