Delta Hedging Liquidity Positions on Automated Market Makers
- URL: http://arxiv.org/abs/2208.03318v1
- Date: Thu, 4 Aug 2022 19:30:26 GMT
- Title: Delta Hedging Liquidity Positions on Automated Market Makers
- Authors: Akhilesh (Adam) Khakhar and Xi Chen
- Abstract summary: Liquidity Providers on Automated Market Makers generate millions of USD in transaction fees daily.
The net value of a Liquidity Position is vulnerable to price changes in the underlying assets in the pool.
We propose a new metric to measure Liquidity Position PNL based on price movement from the underlying assets.
- Score: 5.122487534787007
- License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
- Abstract: Liquidity Providers on Automated Market Makers generate millions of USD in
transaction fees daily. However, the net value of a Liquidity Position is
vulnerable to price changes in the underlying assets in the pool. The dominant
measure of loss in a Liquidity Position is Impermanent Loss. Impermanent Loss
for Constant Function Market Makers has been widely studied. We propose a new
metric to measure Liquidity Position PNL based on price movement from the
underlying assets. We show how this new metric more appropriately measures the
change in the net value of a Liquidity Position as a function of price movement
in the underlying assets. Our second contribution is an algorithm to delta
hedge arbitrary Liquidity Positions on both uniform liquidity Automated Market
Makers (such as Uniswap v2) and concentrated liquidity Automated Market Makers
(such as Uniswap v3) via a combination of derivatives.
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