Backtesting Framework for Concentrated Liquidity Market Makers on Uniswap V3 Decentralized Exchange

Andrey Urusov, Rostislav Berezovskiy and Yury Yanovich
Additional contact information
Andrey Urusov: Vega Institute Foundation
Rostislav Berezovskiy: Vega Institute Foundation
Yury Yanovich: Skolkovo Institute of Science and Technology

Papers from arXiv.org

Abstract: Decentralized finance (DeFi) has revolutionized the financial landscape, with protocols like Uniswap offering innovative automated market-making mechanisms. This article explores the development of a backtesting framework specifically tailored for concentrated liquidity market makers (CLMM). The focus is on leveraging the liquidity distribution approximated using a parametric model, to estimate the rewards within liquidity pools. The article details the design, implementation, and insights derived from this novel approach to backtesting within the context of Uniswap V3. The developed backtester was successfully utilized to assess reward levels across several pools using historical data from 2023 (pools Uniswap v3 for pairs of altcoins, stablecoins and USDC/ETH with different fee levels). Moreover, the error in modeling the level of rewards for the period under review for each pool was less than 1\%. This demonstrated the effectiveness of the backtester in quantifying liquidity pool rewards and its potential in estimating LP's revenues as part of the pool rewards, as focus of our next research. The backtester serves as a tool to simulate trading strategies and liquidity provision scenarios, providing a quantitative assessment of potential returns for liquidity providers (LP). By incorporating statistical tools to mirror CLMM pool liquidity dynamics, this framework can be further leveraged for strategy enhancement and risk evaluation for LPs operating within decentralized exchanges.

Date: 2024-10
New Economics Papers: this item is included in nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/2410.09983 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:2410.09983

Access Statistics for this paper

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