An Economic Model of a Decentralized Exchange with Concentrated Liquidity

References

• Adams H, Zinsmeister N, Robinson D (2020) Uniswap v2 core, 2020. Accessed February 10, 2025, https://uniswap.org/whitepaper.pdf. Google Scholar
• Angeris G, Chitra T (2020) Improved price oracles: Constant function market makers. Proc. 2nd ACM Conf. Adv. Financial Tech., AFT ‘20 (Association for Computing Machinery, New York), 80–91.Google Scholar
• Angeris G, Evans A, Chitra T (2021) Replicating monotonic payoffs without oracles. Preprint, submitted November 26, https://arxiv.org/abs/2111.13740.Google Scholar
• Aoyagi J (2020) Liquidity provision by automated market makers. Preprint, submitted May 14, https://dx.doi.org/10.2139/ssrn.3674178.Google Scholar
• Aoyagi J, Ito Y (2025) Coexisting exchange platforms: Limit order books and automated market makers. J. Political Econom. Microeconomics. Forthcoming.Crossref, Google Scholar
• Bachu B, Hasbrouck J, Saleh F, Wan X (2025) An overview of uniswap v4 for researchers. Working paper, Stern School of Business, New York University, New York.Google Scholar
• Barbon A, Ranaldo A (2021) On the quality of cryptocurrency markets: Centralized versus decentralized exchanges. Preprint, submitted December 14, https://arxiv.org/abs/2112.07386.Google Scholar
• Biais B, Bisière C, Bouvard M, Casamatta C (2019) The blockchain folk theorem. Rev. Financial Stud. 32(5):1662–1715.Crossref, Google Scholar
• Black F, Scholes M (1973) The pricing of options and corporate liabilities. J. Political Econom. 81(3):637–654.Crossref, Google Scholar
• Caparros B, Chaudhary A, Klein O (2023) Blockchain scaling and liquidity concentration on decentralized exchanges. Preprint, submitted June 18, http://dx.doi.org/10.2139/ssrn.4475460.Google Scholar
• Capponi A, Jia R (2021) The adoption of blockchain-based decentralized exchanges. Working paper, Columbia University, New York.Google Scholar
• Cartea Á, Drissi F, Monga M (2023) Decentralised finance and automated market making: Execution and speculation. Preprint, submitted July, https://arxiv.org/abs/2307.03499.Google Scholar
• Chaudhary A, Kozhan R, Viswanath-Natraj G (2023) Interest rate parity in decentralized finance. WBS Finance Group Research Paper Forthcoming.Google Scholar
• Chemaya N, Cong LW, Jorgensen E, Liu D, Zhang L (2025) A dataset of uniswap daily transaction indices by network. Sci. Data 12(1):93.Crossref, Google Scholar
• Chiu J, Koeppl TV (2022) The economics of cryptocurrency: Bitcoin and beyond. Can. J. Econom. 55(4):1762–1798.Crossref, Google Scholar
• Chiu J, Ozdenoren E, Yuan K, Zhang S (2023) On the fragility of DeFi lending. Preprint, submitted January 20, http://dx.doi.org/10.2139/ssrn.4328481.Google Scholar
• Cong LW, He Z (2019) Blockchain disruption and smart contracts. Rev. Financial Stud. 32(5):1754–1797.Crossref, Google Scholar
• Cong LW, He Z, Tang K (2022) The tokenomics of staking. Preprint, submitted April 6, http://dx.doi.org/10.2139/ssrn.4059460.Google Scholar
• Cong LW, Li Y, Wang N (2021) Tokenomics: Dynamic adoption and valuation. Rev. Financial Stud. 34(3):1105–1155.Crossref, Google Scholar
• Copeland T, Galai D (1983) Information effects and the bid-ask spread. J. Finance 38(5):1457–1469.Google Scholar
• Cox JC, Ingersoll JE Jr, Ross SA (1985) A theory of the term structure of interest rates. Econometrica 53(2):385–407.Crossref, Google Scholar
• Deng J, Zong H, Wang Y (2023) Static replication of impermanent loss for concentrated liquidity provision in decentralised markets. Oper. Res. Lett. 51(3):206–211.Crossref, Google Scholar
• Duffie D, Pan J, Singleton K (2000) Transform analysis and asset pricing for affine jump-diffusions. Econometrica 68(6):1343–1376.Crossref, Google Scholar
• Easley D, O’Hara M, Basu S (2019) From mining to markets: The evolution of bitcoin transaction fees. J. Financial Econom. 134(1):91–109.Crossref, Google Scholar
• Engle RF (1982) Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica 50(4):987–1007.Crossref, Google Scholar
• Evans A (2021) Liquidity provider returns in geometric mean markets. Cryptoeconomic Systems 1(2).Google Scholar
• Harvey CR, Hasbrouck J, Saleh F (2024) The evolution of decentralized exchange: Risks, benefits, and oversight. Working paper, Wharton Initiative on Financial Policy and Regulation, Philadelphia.Google Scholar
• Hasbrouck J, Rivera TJ, Saleh F (2022) The need for fees at a DEX: How increases in fees can increase DEX trading volume. Preprint, submitted August 26, http://dx.doi.org/10.2139/ssrn.4192925.Google Scholar
• Heimbach L, Schertenleib E, Wattenhofer R (2023) Risks and returns of Uniswap v3 liquidity providers. Proc. 4th ACM Conf. Adv. Financial Technologies (Association for Computing Machinery, New York).Google Scholar
• Heston S (1993) A closed-form solution for options with stochastic volatility with applications to bond and currency options. Rev. Financial Stud. 6 (2):327–343.Crossref, Google Scholar
• Huberman G, Leshno JD, Moallemi C (2021) Monopoly without a monopolist: An economic analysis of the Bitcoin payment system. Rev. Econom. Stud. 88(6):3011–3040.Crossref, Google Scholar
• John K, Saleh F (2025) Cryptoeconomics. Oxford Research Encyclopedia of Economics and Finance (Oxford University Press).Google Scholar
• John K, Kogan L, Saleh F (2023) Smart contracts and decentralized finance. Annual Rev. Financial Econom. 15:523–542.Crossref, Google Scholar
• John K, O’Hara M, Saleh F (2022) Bitcoin and beyond. Annual Rev. Financial Econom. 14:95–115.Crossref, Google Scholar
• John K, Rivera TJ, Saleh F (2025) Proof-of-work versus proof-of-stake: A comparative economic analysis. Rev. Financial Stud. Forthcoming.Crossref, Google Scholar
• Karatzas I, Shreve S (1991) Brownian Motion and Stochastic Calculus, vol. 113 (Springer, New York).Google Scholar
• Lehar A, Parlour C (2020) Miner collusion and the Bitcoin protocol. Preprint, submitted April 17, http://dx.doi.org/10.2139/ssrn.3559894.Google Scholar
• Lehar A, Parlour CA (2022) Systemic fragility in decentralized markets. Preprint, submitted July 25, http://dx.doi.org/10.2139/ssrn.4164833.Google Scholar
• Lehar A, Parlour CA (2025) Decentralized exchange: The Uniswap automated market maker. J. Finance 80(1):321–374.Crossref, Google Scholar
• Lehar A, Parlour CA, Zoican M (2022) Fragmentation and optimal liquidity supply on decentralized exchanges. Preprint, submitted November 17, http://dx.doi.org/10.2139/ssrn.4267429.Google Scholar
• Mayer S (2022) Token-based platforms and speculators. Preprint, submitted October 28, http://dx.doi.org/10.2139/ssrn.3471977.Google Scholar
• Milionis J, Moallemi CC, Roughgarden T, Zhang AL (2022) Automated market making and loss-versus-rebalancing. Preprint, submitted August 11, https://arxiv.org/abs/2208.06046.Google Scholar
• Neuder M, Rao R, Moroz DJ, Parkes DC (2021) Strategic liquidity provision in uniswap v3. Preprint, submitted August 11, https://arxiv.org/abs/2208.06046.Google Scholar
• Park A (2021) The conceptual flaws of constant product automated market making. Working paper, University of Toronto, Toronto.Google Scholar
• Rivera TJ, Saleh F, Vandeweyer Q (2023) Equilibrium in a DeFi lending market. Preprint, submitted March 22, http://dx.doi.org/10.2139/ssrn.4389890.Google Scholar
• Saleh F (2021) Blockchain without waste: Proof-of-stake. Rev. Financial Stud. 34(3):1156–1190.Crossref, Google Scholar