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We investigate the behavior of liquidity providers (LPs) by modeling a decentralized cryptocurrency exchange (DEX) based on Uniswap v3. LPs with heterogeneous characteristics choose optimal liquidity positions subject to uncertainty…
As of August 2022, blockchain-based assets boast a combined market capitalisation exceeding one trillion USD, among which the most prominent are the decentralised autonomous organisation (DAO) tokens associated with decentralised finance…
Decentralized Finance (DeFi) has reshaped the possibilities of reserve banking in the form of the Collateralized Debt Position (CDP). Key to the safety of CDPs is the money supply architecture that enables issued debt to maintain its value.…
Decentralized exchanges (DEXs) are crucial to decentralized finance (DeFi) as they enable trading without intermediaries. However, they face challenges like impermanent loss (IL), where liquidity providers (LPs) see their assets' value…
Three traits of decentralized finance are studied. First, the market impact function is derived for optimal-growth liquidity providers. For a standard random walk, the classic square-root impact is recovered. An extension is then derived to…
Smart contracts led to the emergence of the decentralized finance (DeFi) marketplace within blockchain ecosystems, where diverse participants engage in financial activities. In traditional finance, there are possibilities to create values,…
We study the problem of optimally hedging the price exposure of liquidity positions in constant-product automated market makers (AMMs) when the hedge is funded by collateralized borrowing. A liquidity provider (LP) who borrows tokens to…
Financial options are fundamental to traditional markets, enabling strategies ranging from hedging to speculating. Yet, while the Automated Market Maker paradigm has revolutionized decentralized spot markets, no equivalent standard has…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
Decentralized Finance (DeFi) refers to financial services that are not necessarily related to crypto-currencies. By employing blockchain for security and integrity, DeFi creates new possibilities that attract retail and institution users,…
We provide an overview of decentralized protocols like Compound and Aave that offer collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance (DeFi) ecosystem.…
Auto-deleveraging (ADL) mechanisms are a critical yet understudied component of risk management on cryptocurrency futures exchanges. When available margin and other loss-absorbing resources are insufficient to cover losses following large…
Decentralized Finance (DeFi) is a new paradigm in the creation, distribution, and utilization of financial services via the integration of blockchain technology. Our research conducts a comprehensive introduction and meticulous…
Constant product markets with concentrated liquidity (CL) are the most popular type of automated market makers. In this paper, we characterise the continuous-time wealth dynamics of strategic LPs who dynamically adjust their range of…
This paper compares mathematical models for automated market makers including logarithmic market scoring rule (LMSR), liquidity sensitive LMSR (LS-LMSR), constant product/mean/sum, and others. It is shown that though LMSR may not be a good…
Decentralized lending protocols within the decentralized finance ecosystem enable the lending and borrowing of crypto-assets without relying on traditional intermediaries. Interest rates in these protocols are set algorithmically and…
Liquid staking and restaking represent recent innovations in Decentralized Finance (DeFi) that garnered user interest and capital. Liquid Staking Tokens (LSTs), tokenized representations of staked tokens on Proof-of-Stake (PoS) blockchains,…
Yield farming represents an immensely popular asset management activity in decentralized finance (DeFi). It involves supplying, borrowing, or staking crypto assets to earn an income in forms of transaction fees, interest, or participation…
Flash Loan attack can grab millions of dollars from decentralized vaults in one single transaction, drawing increasing attention from the Decentralized Finance (DeFi) players. It has also demonstrated an exciting opportunity that a huge…
The limit order book mechanism has been the core trading mechanism of the modern financial market. In the cryptocurrency market, centralized exchanges also adopt this limit order book mechanism and a centralized matching engine dynamically…