Chasing Price Drains Liquidity

Ruichao Jiang (), Long Wen (), Yizhou Cao () and Yepeng Ding ()
Additional contact information
Ruichao Jiang: Derivation Technology Ltd.
Long Wen: Derivation Technology Ltd.
Yizhou Cao: Derivation Technology Ltd.
Yepeng Ding: Hiroshima University

A chapter in Mathematical Research for Blockchain Economy, 2026, pp 304-320 from Springer

Abstract: Abstract Assuming that the price in a Uniswap v3 style Automated Market Maker (AMM) follows a Geometric Brownian Motion (GBM), we prove that the strategy that adjusts the position of liquidity to track the current price leads to a deterministic and exponentially fast decay of liquidity. Next, assuming that there is a Centralized Exchange (CEX), in which the price follows a GBM and the AMM price mean reverts to the CEX price, we show numerically that the same strategy still leads to decay. Last, we propose a strategy that increases the liquidity even without compounding fees earned through liquidity provision.

Keywords: Automated Market Maker; Decentralized Finance; Mathematical Finance (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1007/978-3-032-13377-9_15

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