DeFi (Decentralized Finance)

Ergodic optimal liquidations in DeFi ArXiv ID: 2411.19637 “View on arXiv” Authors: Unknown Abstract We address the liquidation problem arising from the credit risk management in decentralised finance (DeFi) by formulating it as an ergodic optimal control problem. In decentralised derivatives exchanges, liquidation is triggered whenever the parties fail to maintain sufficient collateral for their open positions. Consequently, effectively managing and liquidating disposal of positions accrued through liquidations is a critical concern for decentralised derivatives exchanges. By simplifying the model (linear temporary and permanent price impacts, simplified cash balance dynamics), we derive the closed-form solutions for the optimal liquidation strategies, which balance immediate executions with the temporary and permanent price impacts, and the optimal long-term average reward. Numerical simulations further highlight the effectiveness of the proposed optimal strategy and demonstrate that the simplified model closely approximates the original market environment. Finally, we provide the method for calibrating the parameters in the model from the available data. ...

Measuring Arbitrage Losses and Profitability of AMM Liquidity ArXiv ID: 2404.05803 “View on arXiv” Authors: Unknown Abstract This paper presents the results of a comprehensive empirical study of losses to arbitrageurs (following the formalization of loss-versus-rebalancing by [“Milionis et al., 2022”]) incurred by liquidity providers on automated market makers (AMMs). We show that those losses exceed the fees earned by liquidity providers across many of the largest AMM liquidity pools (on Uniswap). Remarkably, we also find that the Uniswap v2 pools are more profitable for passive LPs than their Uniswap v3 counterparts. We also investigate how arbitrage losses change with block times. As expected, arbitrage losses decrease when block production is faster. However, the rate of the decline varies significantly across different trading pairs. For instance, when comparing 100ms block times to Ethereum’s current 12-second block times, the decrease in losses to arbitrageurs ranges between 20% to 70%, depending on the specific trading pair. ...

A theoretical framework for fees in AMMs ArXiv ID: 2404.03976 “View on arXiv” Authors: Unknown Abstract In the ever evolving landscape of decentralized finance automated market makers (AMMs) play a key role: they provide a market place for trading assets in a decentralized manner. For so-called bluechip pairs, arbitrage activity provides a major part of the revenue generation of AMMs but also a major source of loss due to the so-called informed orderflow. Finding ways to minimize those losses while still keeping uninformed trading activity alive is a major problem in the field. In this paper we will investigate the mechanics of said arbitrage and try to understand how AMMs can maximize the revenue creation or in other words minimize the losses. To that end, we model the dynamics of arbitrage activity for a concrete implementation of a pool and study its sensitivity to the choice of fee aiming to maximize the value retention. We manage to map the ensuing dynamics to that of a random walk with a specific reward scheme that provides a convenient starting point for further studies. ...