Concentrated Liquidity in Ethereum Blockchain’s Digital Asset Trading: Insights from Innovative Back-Testing Algorithms

Kai Luo (), Nanlin Jin () and Jieming Ma ()
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Kai Luo: Xi’an Jiaotong-Liverpool University
Nanlin Jin: Xi’an Jiaotong-Liverpool University
Jieming Ma: Xi’an Jiaotong-Liverpool University

Computational Economics, 2025, vol. 66, issue 5, No 1, 3607-3635

Abstract: Abstract Blockchain has started moving to Ethereum, decentralised and open-source. One of the most important application domains of the Ethereum blockchain is decentralised finance (DeFi). It facilitates speed-up trading, in absence of the traditional financial intermediaries, such as brokerages, exchanges, or banks. The three main types of digital asset trading strategies are concentrated liquidity, unbounded liquidity, and grid trading. Concentrated liquidity has recently been designed to increase the liquidity provision that indicates the convertibility of assets. Currently, the performance comparison of these three types of trading remains largely unclear. This research proposes back-testing algorithms to measure their return on investment (ROI). Our research has been conducted on real Ethereum blockchains and has discovered that their ROIs vary and depend on price fluctuation. These findings will shed new insights in the design of future decentralised trading strategies.

Keywords: Concentrated liquidity; Ethereum blockchain; Back-testing algorithm (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10614-024-10823-x

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