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| Main Authors: | , , , |
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| Format: | Preprint |
| Published: |
2025
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2501.12583 |
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| _version_ | 1866912199247659008 |
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| author | Cao, Yizhou Ding, Yepeng Jiang, Ruichao Wen, Long |
| author_facet | Cao, Yizhou Ding, Yepeng Jiang, Ruichao Wen, Long |
| contents | Assuming that the price in a Uniswap v3 style Automated Market Maker (AMM) follows a Geometric Brownian Motion (GBM), we prove that the strategy that adjusts the position of liquidity to track the current price leads to a deterministic and exponentially fast decay of liquidity. Next, assuming that there is a Centralized Exchange (CEX), in which the price follows a GBM and the AMM price mean reverts to the CEX price, we show numerically that the same strategy still leads to decay. Last, we propose a strategy that increases the liquidity even without compounding fees earned through liquidity provision. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2501_12583 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Chasing price drains liquidity Cao, Yizhou Ding, Yepeng Jiang, Ruichao Wen, Long Computational Engineering, Finance, and Science Assuming that the price in a Uniswap v3 style Automated Market Maker (AMM) follows a Geometric Brownian Motion (GBM), we prove that the strategy that adjusts the position of liquidity to track the current price leads to a deterministic and exponentially fast decay of liquidity. Next, assuming that there is a Centralized Exchange (CEX), in which the price follows a GBM and the AMM price mean reverts to the CEX price, we show numerically that the same strategy still leads to decay. Last, we propose a strategy that increases the liquidity even without compounding fees earned through liquidity provision. |
| title | Chasing price drains liquidity |
| topic | Computational Engineering, Finance, and Science |
| url | https://arxiv.org/abs/2501.12583 |