Risk-Neutral Pricing Model of Uniswap Liquidity Providing Position: A Stopping Time Approach

TL;DR

This paper presents a new risk-neutral pricing model for Uniswap V3 liquidity positions using stochastic processes and stopping time theory, aiding providers in risk assessment and hedging.

Contribution

It introduces a novel stochastic model for Uniswap V3 valuation based on martingale stopping times, enhancing understanding of liquidity provider risks.

Findings

Model effectively captures Uniswap V3 position valuation.

Numerical analysis demonstrates practical applicability.

Sensitivity analysis informs risk management strategies.

Abstract

In this paper, we introduce a novel pricing model for Uniswap V3, built upon stochastic processes and the Martingale Stopping Theorem. This model innovatively frames the valuation of positions within Uniswap V3. We further conduct a numerical analysis and examine the sensitivities through Greek risk measures to elucidate the model's implications. The results underscore the model's significant academic contribution and its practical applicability for Uniswap liquidity providers, particularly in assessing risk exposure and guiding hedging strategies.