DEX Specs: A Mean Field Approach to DeFi Currency Exchanges
Fuente:
arXiv
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| Autori principali: | , , |
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| Natura: | Preprint |
| Pubblicazione: |
2024
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| _version_ | 1866916204999868416 |
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| author | Bayraktar, Erhan Cohen, Asaf Nellis, April |
| author_facet | Bayraktar, Erhan Cohen, Asaf Nellis, April |
| contents | We investigate the behavior of liquidity providers (LPs) by modeling a decentralized cryptocurrency exchange (DEX) based on Uniswap v3. LPs with heterogeneous characteristics choose optimal liquidity positions subject to uncertainty regarding the size of exogenous incoming transactions and the prices of assets in the wider market. They engage in a game among themselves, and the resulting liquidity distribution determines the exchange rate dynamics and potential arbitrage opportunities of the pool. We calibrate the distribution of LP characteristics based on Uniswap data and the equilibrium strategy resulting from this mean-field game produces pool exchange rate dynamics and liquidity evolution consistent with observed pool behavior. We subsequently introduce Maximal Extractable Value (MEV) bots who perform Just-In-Time (JIT) liquidity attacks, and develop a Stackelberg game between LPs and bots. This addition results in more accurate simulated pool exchange rate dynamics and stronger predictive power regarding the evolution of the pool liquidity distribution. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2404_09090 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | DEX Specs: A Mean Field Approach to DeFi Currency Exchanges Bayraktar, Erhan Cohen, Asaf Nellis, April Trading and Market Microstructure We investigate the behavior of liquidity providers (LPs) by modeling a decentralized cryptocurrency exchange (DEX) based on Uniswap v3. LPs with heterogeneous characteristics choose optimal liquidity positions subject to uncertainty regarding the size of exogenous incoming transactions and the prices of assets in the wider market. They engage in a game among themselves, and the resulting liquidity distribution determines the exchange rate dynamics and potential arbitrage opportunities of the pool. We calibrate the distribution of LP characteristics based on Uniswap data and the equilibrium strategy resulting from this mean-field game produces pool exchange rate dynamics and liquidity evolution consistent with observed pool behavior. We subsequently introduce Maximal Extractable Value (MEV) bots who perform Just-In-Time (JIT) liquidity attacks, and develop a Stackelberg game between LPs and bots. This addition results in more accurate simulated pool exchange rate dynamics and stronger predictive power regarding the evolution of the pool liquidity distribution. |
| title | DEX Specs: A Mean Field Approach to DeFi Currency Exchanges |
| topic | Trading and Market Microstructure |
| url | https://arxiv.org/abs/2404.09090 |