Cryptocurrency / DeFi

Global Public Sentiment on Decentralized Finance: A Spatiotemporal Analysis of Geo-tagged Tweets from 150 Countries ArXiv ID: 2409.00843 “View on arXiv” Authors: Unknown Abstract Blockchain technology and decentralized finance (DeFi) are reshaping global financial systems. Despite their impact, the spatial distribution of public sentiment and its economic and geopolitical determinants are often overlooked. This study analyzes over 150 million geo-tagged, DeFi-related tweets from 2012 to 2022, sourced from a larger dataset of 7.4 billion tweets. Using sentiment scores from a BERT-based multilingual classification model, we integrated these tweets with economic and geopolitical data to create a multimodal dataset. Employing techniques like sentiment analysis, spatial econometrics, clustering, and topic modeling, we uncovered significant global variations in DeFi engagement and sentiment. Our findings indicate that economic development significantly influences DeFi engagement, particularly after 2015. Geographically weighted regression analysis revealed GDP per capita as a key predictor of DeFi tweet proportions, with its impact growing following major increases in cryptocurrency values such as bitcoin. While wealthier nations are more actively engaged in DeFi discourse, the lowest-income countries often discuss DeFi in terms of financial security and sudden wealth. Conversely, middle-income countries relate DeFi to social and religious themes, whereas high-income countries view it mainly as a speculative instrument or entertainment. This research advances interdisciplinary studies in computational social science and finance and supports open science by making our dataset and code available on GitHub, and providing a non-code workflow on the KNIME platform. These contributions enable a broad range of scholars to explore DeFi adoption and sentiment, aiding policymakers, regulators, and developers in promoting financial inclusion and responsible DeFi engagement globally. ...

Unified Approach for Hedging Impermanent Loss of Liquidity Provision ArXiv ID: 2407.05146 “View on arXiv” Authors: Unknown Abstract We develop static and dynamic approaches for hedging of the impermanent loss (IL) of liquidity provision (LP) staked at Decentralised Exchanges (DEXes) which employ Uniswap V2 and V3 protocols. We provide detailed definitions and formulas for computing the IL to unify different definitions occurring in the existing literature. We show that the IL can be seen a contingent claim with a non-linear payoff for a fixed maturity date. Thus, we introduce the contingent claim termed as IL protection claim which delivers the negative of IL payoff at the maturity date. We apply arbitrage-based methods for valuation and risk management of this claim. First, we develop the static model-independent replication method for the valuation of IL protection claim using traded European vanilla call and put options. We extend and generalize an existing method to show that the IL protection claim can be hedged perfectly with options if there is a liquid options market. Second, we develop the dynamic model-based approach for the valuation and hedging of IL protection claims under a risk-neutral measure. We derive analytic valuation formulas using a wide class of price dynamics for which the characteristic function is available under the risk-neutral measure. As base cases, we derive analytic valuation formulas for IL protection claim under the Black-Scholes-Merton model and the log-normal stochastic volatility model. We finally discuss estimation of risk-reward of LP staking using our results. ...

FLAIR: A Metric for Liquidity Provider Competitiveness in Automated Market Makers ArXiv ID: 2306.09421 “View on arXiv” Authors: Unknown Abstract This paper aims to enhance the understanding of liquidity provider (LP) returns in automated market makers (AMMs). LPs face market risk as well as adverse selection due to risky asset holdings in the pool that they provide liquidity to and the informational asymmetry between informed traders (arbitrageurs) and AMMs. Loss-versus-rebalancing (LVR) quantifies the adverse selection cost (Milionis et al., 2022a), and is a popular metric to evaluate the flow toxicity to an AMM. However, individual LP returns are critically affected by another factor orthogonal to the above: the competitiveness among LPs. This work introduces a novel metric for LP competitiveness, called FLAIR (short for fee liquidity-adjusted instantaneous returns), that aims to supplement LVR in assessments of LP performance to capture the dynamic behavior of LPs in a pool. Our metric reflects the characteristics of fee return-on-capital, and differentiates active liquidity provisioning strategies in AMMs. To illustrate how both flow toxicity, accounting for the sophistication of the counterparty of LPs, as well as LP competitiveness, accounting for the sophistication of the competition among LPs, affect individual LP returns, we propose a quadrant interpretation where all of these characteristics may be readily visualized. We examine LP competitiveness in an ex-post fashion, and show example cases in all of which our metric confirms the expected nuances and intuition of competitiveness among LPs. FLAIR has particular merit in empirical analyses, and is able to better inform practical assessments of AMM pools. ...