Liquidity Provider Position Analysis and Pricing in Automated Market Making Systems

Grigoriy Korolev ()
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Grigoriy Korolev: New Economic School

No sp0001, Working Papers from New Economic School (NES)

Abstract: Decentralized Finance (DeFi) has Automated Market Making (AMM) as a dominant. It allows decentralized exchanges to operate via liquidity pools. Crypto assets are traded in automatic way without any control by market makers with two types of agents: traders and liquidity providers (LPs). This paper develops a comprehensive framework for analyzing and pricing LP positions in protocol Uniswap. We demonstrate that an LP's position exhibits option-like characteristics and derive closed-form pricing formulas. Our empirical analysis of ETH-USDC returns reveals heavy-tailed distributions with significant asymmetry, indicating greater downside risk. Importantly, we show that concentrated liquidity in Uniswap V3 generates substantially higher returns compared to uniform liquidity in V2. The pricing models presented enable precise valuation of these novel financial instruments, allowing them to launch on the market.

Keywords: Automated market making; Decentralized Finance; cryptocurrency; asset pricing; liquidity provider; heavy tails (search for similar items in EconPapers)
JEL-codes: G15 G23 G29 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2026-03
New Economics Papers: this item is included in nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:abo:neswpt:sp0001

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