Proactive Market Making and Liquidity Analysis for Everlasting Options in DeFi Ecosystems

ArXiv ID: 2508.07068 “View on arXiv”

Authors: Hardhik Mohanty, Giovanni Zaarour, Bhaskar Krishnamachari

Abstract

Everlasting options, a relatively new class of perpetual financial derivatives, have emerged to tackle the challenges of rolling contracts and liquidity fragmentation in decentralized finance markets. This paper offers an in-depth analysis of markets for everlasting options, modeled using a dynamic proactive market maker. We examine the behavior of funding fees and transaction costs across varying liquidity conditions. Using simulations and modeling, we demonstrate that liquidity providers can aim to achieve a net positive PnL by employing effective hedging strategies, even in challenging environments characterized by low liquidity and high transaction costs. Additionally, we provide insights into the incentives that drive liquidity providers to support the growth of everlasting option markets and highlight the significant benefits these instruments offer to traders as a reliable and efficient financial tool.

Keywords: Everlasting Options, Perpetual Derivatives, Dynamic Market Maker, Funding Fees, Hedging Strategies, Cryptocurrency

Complexity vs Empirical Score

• Math Complexity: 7.0/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail
• Why: The paper employs advanced stochastic calculus (Geometric Brownian Motion, Black-Scholes pricing derivations, and dynamic hedging equations) demonstrating high mathematical density. It also shows strong empirical rigor by providing simulation code links, detailed parameter tables, and graphical analysis of slippage and funding fees across varying liquidity conditions.

  flowchart TD
    A["Research Goal: Analyze proactive market making for everlasting options in DeFi"] --> B["Data Inputs: Simulated Market Conditions<br/>Liquidity & Transaction Cost Variables"]
    B --> C["Modeling: Dynamic Proactive Market Maker<br/>& Funding Fee Mechanics"]
    C --> D["Computation: PnL Simulation &<br/>Hedging Strategy Analysis"]
    D --> E{"Outcome: Net Positive PnL Achieved?"}
    E -- Yes --> F["Key Findings: Effective hedging ensures profitability<br/>even in low liquidity/high cost environments"]
    E -- No --> G["Refine Model Parameters"]
    G --> D