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Delta Hedging Liquidity Positions on Automated Market Makers

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  • Adam Khakhar
  • Xi Chen

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.

Suggested Citation

  • Adam Khakhar & Xi Chen, 2022. "Delta Hedging Liquidity Positions on Automated Market Makers," Papers 2208.03318, arXiv.org, revised Dec 2022.
    • Handle: RePEc:arx:papers:2208.03318
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    File URL: http://arxiv.org/pdf/2208.03318
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    References listed on IDEAS

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    1. Neelesh Tiruviluamala & Alexander Port & Erik Lewis, 2022. "A General Framework for Impermanent Loss in Automated Market Makers," Papers 2203.11352, arXiv.org.
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    Cited by:

    1. Daniel Kirste & Niclas Kannengie{ss}er & Ricky Lamberty & Ali Sunyaev, 2023. "How Automated Market Makers Approach the Thin Market Problem in Cryptoeconomic Systems," Papers 2309.12818, arXiv.org, revised Sep 2023.

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