Automated Market Makers: Toward More Profitable Liquidity Provisioning Strategies

TL;DR

This paper introduces a measurement model based on impermanent loss to analyze how key parameters affect liquidity providers' profitability in automated market makers, using historical data from Uniswap v3 to guide better strategies.

Contribution

It develops a novel measurement model to evaluate liquidity provisioning strategies and analyzes extensive historical data to identify factors influencing LP profitability.

Findings

Key parameters significantly impact LP returns.

Certain liquidity pool types and position durations enhance profitability.

The model guides LPs to develop more profitable strategies.

Abstract

To trade tokens in cryptoeconomic systems, automated market makers (AMMs) typically rely on liquidity providers (LPs) that deposit tokens in exchange for rewards. To profit from such rewards, LPs must use effective liquidity provisioning strategies. However, LPs lack guidance for developing such strategies, which often leads them to financial losses. We developed a measurement model based on impermanent loss to analyze the influences of key parameters (i.e., liquidity pool type, position duration, position range size, and position size) of liquidity provisioning strategies on LPs' returns. To reveal the influences of those key parameters on LPs' profits, we used the measurement model to analyze 700 days of historical liquidity provision data of Uniswap v3. By uncovering the influences of key parameters of liquidity provisioning strategies on profitability, this work supports LPs in developing more profitable strategies.