Generalizing Impermanent Loss on Decentralized Exchanges with Constant Function Market Makers

Rohan Tangri, Peter Yatsyshin, Elisabeth A. Duijnstee and Danilo Mandic

Papers from arXiv.org

Abstract: Liquidity providers are essential for the function of decentralized exchanges to ensure liquidity takers can be guaranteed a counterparty for their trades. However, liquidity providers investing in liquidity pools face many risks, the most prominent of which is impermanent loss. Currently, analysis of this metric is difficult to conduct due to different market maker algorithms, fee structures and concentrated liquidity dynamics across the various exchanges. To this end, we provide a framework to generalize impermanent loss for multiple asset pools obeying any constant function market maker with optional concentrated liquidity. We also discuss how pool fees fit into the framework, and identify the condition for which liquidity provisioning becomes profitable when earnings from trading fees exceed impermanent loss. Finally, we demonstrate the utility and generalizability of this framework with simulations in BalancerV2 and UniswapV3.

Date: 2023-01
New Economics Papers: this item is included in nep-mst
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/2301.06831 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2301.06831

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().