An Economic Model of a Decentralized Exchange with Concentrated Liquidity
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SeriesTI Finance Research Seminars
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Speaker(s)Fahad Saleh (University of Florida, United States)
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FieldFinance
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LocationTinbergen Institute Amsterdam, room 1.01
Amsterdam -
Date and time
October 10, 2024
15:00 - 16:15
Abstract
We develop an economic model of a decentralized exchange with concentrated liquidity (i.e., Uniswap V3) with a particular focus on the economics of liquidity provision. We demonstrate that providing liquidity for a risky/risk-free asset pool is comparable to investing in a covered call except that the call option therein is sold at intrinsic rather than market value. Hence, when providing liquidity, liquidity providers forgo the time premium of the call option in exchange for fees and thus equilibrium liquidity provision decreases in the time premium. Finally, we provide an expression for equilibrium liquidity provision which is useful for empirical work. Joint paper with Joel Hasbrouck and Thomas J Rivera.
Please notice that this seminar starts at 15:00! No lunch will be provided due to a later start time than normal.