Liquidity provision with $\tau$-reset strategies: a dynamic historical liquidity approach

Andrey Urusov, Rostislav Berezovskiy, Anatoly Krestenko and Andrei Kornilov

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Abstract: Since the launch of Uniswap and other AMM protocols, the DeFi industry has evolved from simple constant product functions with uniform liquidity distribution across the entire price axis to more advanced mechanisms that allow Liquidity Providers (LPs) to concentrate capital within selected price ranges. This evolution has introduced new research challenges focused on optimizing capital allocation in Decentralized Exchanges (DEXs) under dynamic market conditions. In this paper, we present a methodology for finding optimal liquidity provision strategies in DEXs within a specific family of $\tau$-reset strategies. The approach is detailed step by step and includes an original method for approximating historical liquidity within active pool ranges using a parametric model that does not rely on historical liquidity data. We find optimal LP strategies using a machine learning approach, evaluate performance over an out-of-time period, and compare the resulting strategies against a uniform benchmark. All experiments were conducted using a custom backtesting framework specifically developed for Concentrated Liquidity Market Makers (CLMMs). The effectiveness and flexibility of the proposed methodology are demonstrated across various Uniswap v3 trading pairs, and also benchmarked against an alternative backtesting and strategy development tool.

Date: 2025-05
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