nep-mst New Economics Papers
on Market Microstructure
Issue of 2024‒05‒13
two papers chosen by
Thanos Verousis, Vlerick Business School
  1. Measuring Arbitrage Losses and Profitability of AMM Liquidity By Robin Fritsch; Andrea Canidio
  2. Concentration of DeFi’s liquidity: Evidence from Decentralised Exchanges (DEXs) and Automated Market Makers (AMMs) By Iota Kaousar Nassr; Eleftheria Kostika; Anastasia Melachrinos
  1. By: Robin Fritsch; Andrea Canidio
    Abstract: This paper presents the results of a comprehensive empirical study of losses to arbitrageurs (following the formalization of loss-versus-rebalancing by [Milionis et al., 2022]) incurred by liquidity on automated market makers (AMMs). Through a systematic comparison between historical earnings from trading fees and losses to arbitrageurs, our findings indicate an insufficient compensation from fees for arbitrage losses across many of the largest AMM liquidity pools (on Uniswap). Remarkably, we identify a higher profitability among less capital-efficient Uniswap v2 pools compared to their Uniswap v3 counterparts. Moreover, we investigate a possible LVR mitigation by quantifying how arbitrage losses reduce with shorter block times. We observe notable variations in the manner of decline of arbitrage losses across different trading pairs. For instance, when comparing 100ms block times to Ethereum's current 12-second block times, the decrease in losses to arbitrageurs ranges between 20% to 70%, depending on the specific trading pair.
    Date: 2024–04
    URL: http://d.repec.org/n?u=RePEc:arx:papers:2404.05803&r=mst
  2. By: Iota Kaousar Nassr; Eleftheria Kostika; Anastasia Melachrinos
    Abstract: Decentralised exchanges (DEXs) are on-chain platforms where traders can exchange one crypto-asset for another. DEXs play an increasingly important role in the decentralised finance (DeFi) market, particularly in the aftermath of the recent downturn in the crypto-asset market. This working paper explores the characteristics of DEXs and identifies areas of possible concentration in decentralised exchanges activity and potential associated risks. To substantiate the analysis, it uses an original on-chain dataset covering the largest DEXs. The paper reveals an increased concentration within DeFi trading in the sample observed, which could exacerbate vulnerabilities already present in DeFi markets.
    Date: 2024–04–25
    URL: http://d.repec.org/n?u=RePEc:oec:dafaad:49-en&r=mst
This nep-mst issue is ©2024 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at https://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.
This page is being maintained by Thomas Krichel. It was last updated on 2024‒05‒15 at 4:42.