Automated Liquidity: Market Impact, Cycles, and De-pegging Risk
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arXiv
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| Format: | Preprint |
| Published: |
2026
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| _version_ | 1866912829037084672 |
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| author | Meister, B. K. |
| author_facet | Meister, B. K. |
| contents | Three traits of decentralized finance are studied. First, the market impact function is derived for optimal-growth liquidity providers. For a standard random walk, the classic square-root impact is recovered. An extension is then derived to fit general fractional Ornstein-Uhlenbeck processes. These findings break with the linearized liquidity models used in most decentralized exchanges. Second, a Constant Product Market Maker is viewed as a multi-phase Carnot engine, where one phase matches the exchange of tokens by a liquidity taker, and another the change of pool size by a liquidity provider. Third, stablecoin de-pegging is a form of catastrophe risk. By using growth optimization, default odds are linked to the cost of catastrophe bonds. De-pegging insurance can act as a counterweight and a key marketing tool when the law forbids the payment of interest on stablecoins. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2601_11375 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Automated Liquidity: Market Impact, Cycles, and De-pegging Risk Meister, B. K. Portfolio Management Three traits of decentralized finance are studied. First, the market impact function is derived for optimal-growth liquidity providers. For a standard random walk, the classic square-root impact is recovered. An extension is then derived to fit general fractional Ornstein-Uhlenbeck processes. These findings break with the linearized liquidity models used in most decentralized exchanges. Second, a Constant Product Market Maker is viewed as a multi-phase Carnot engine, where one phase matches the exchange of tokens by a liquidity taker, and another the change of pool size by a liquidity provider. Third, stablecoin de-pegging is a form of catastrophe risk. By using growth optimization, default odds are linked to the cost of catastrophe bonds. De-pegging insurance can act as a counterweight and a key marketing tool when the law forbids the payment of interest on stablecoins. |
| title | Automated Liquidity: Market Impact, Cycles, and De-pegging Risk |
| topic | Portfolio Management |
| url | https://arxiv.org/abs/2601.11375 |