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| Format: | Preprint |
| Published: |
2025
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2510.10171 |
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| _version_ | 1866912642651652096 |
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| author | McFarlane, Alexander |
| author_facet | McFarlane, Alexander |
| contents | We derive a slippage-aware toxicity condition for on-chain liquidations executed via a constant-product automated market maker (CP-AMM). For a fixed (constant) liquidation incentive $i$, the familiar toxicity frontier $ν< 1/(1+i)$ tightens to $ν< 1/((1+i)λ)$ for a liquidity penalty factor $λ$ that we derive for both the CP-AMM and a generalised form. Using a dynamic health-linked liquidation incentive $i(h) = i(1 - h)$, we obtain a state-dependent bound and, at the liquidation boundary, a liquidity-depth-only condition $ν< 1/λ$. This reconciles dynamic incentives with the impact of the CP-AMM price and clarifies when dynamic liquidation incentives reduce versus exacerbate spiral risk. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2510_10171 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Toxicity Bounds for Dynamic Liquidation Incentives McFarlane, Alexander Risk Management We derive a slippage-aware toxicity condition for on-chain liquidations executed via a constant-product automated market maker (CP-AMM). For a fixed (constant) liquidation incentive $i$, the familiar toxicity frontier $ν< 1/(1+i)$ tightens to $ν< 1/((1+i)λ)$ for a liquidity penalty factor $λ$ that we derive for both the CP-AMM and a generalised form. Using a dynamic health-linked liquidation incentive $i(h) = i(1 - h)$, we obtain a state-dependent bound and, at the liquidation boundary, a liquidity-depth-only condition $ν< 1/λ$. This reconciles dynamic incentives with the impact of the CP-AMM price and clarifies when dynamic liquidation incentives reduce versus exacerbate spiral risk. |
| title | Toxicity Bounds for Dynamic Liquidation Incentives |
| topic | Risk Management |
| url | https://arxiv.org/abs/2510.10171 |