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Documents authored by Parkes, David C.

Document
DOI: 10.4230/LIPIcs.AFT.2023.25
Strategic Liquidity Provision in Uniswap V3

Authors: Zhou Fan, Francisco Marmolejo-Cossio, Daniel Moroz, Michael Neuder, Rithvik Rao, and David C. Parkes

Published in: LIPIcs, Volume 282, 5th Conference on Advances in Financial Technologies (AFT 2023)

Abstract
Uniswap v3 is the largest decentralized exchange for digital currencies. A novelty of its design is that it allows a liquidity provider (LP) to allocate liquidity to one or more closed intervals of the price of an asset instead of the full range of possible prices. An LP earns fee rewards proportional to the amount of its liquidity allocation when prices move in this interval. This induces the problem of strategic liquidity provision: smaller intervals result in higher concentration of liquidity and correspondingly larger fees when the price remains in the interval, but with higher risk as prices may exit the interval leaving the LP with no fee rewards. Although reallocating liquidity to new intervals can mitigate this loss, it comes at a cost, as LPs must expend gas fees to do so. We formalize the dynamic liquidity provision problem and focus on a general class of strategies for which we provide a neural network-based optimization framework for maximizing LP earnings. We model a single LP that faces an exogenous sequence of price changes that arise from arbitrage and non-arbitrage trades in the decentralized exchange. We present experimental results informed by historical price data that demonstrate large improvements in LP earnings over existing allocation strategy baselines. Moreover we provide insight into qualitative differences in optimal LP behaviour in different economic environments.
Cite as

Zhou Fan, Francisco Marmolejo-Cossio, Daniel Moroz, Michael Neuder, Rithvik Rao, and David C. Parkes. Strategic Liquidity Provision in Uniswap V3. In 5th Conference on Advances in Financial Technologies (AFT 2023). Leibniz International Proceedings in Informatics (LIPIcs), Volume 282, pp. 25:1-25:22, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2023)

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@InProceedings{fan_et_al:LIPIcs.AFT.2023.25,
  author =	{Fan, Zhou and Marmolejo-Cossio, Francisco and Moroz, Daniel and Neuder, Michael and Rao, Rithvik and Parkes, David C.},
  title =	{{Strategic Liquidity Provision in Uniswap V3}},
  booktitle =	{5th Conference on Advances in Financial Technologies (AFT 2023)},
  pages =	{25:1--25:22},
  series =	{Leibniz International Proceedings in Informatics (LIPIcs)},
  ISBN =	{978-3-95977-303-4},
  ISSN =	{1868-8969},
  year =	{2023},
  volume =	{282},
  editor =	{Bonneau, Joseph and Weinberg, S. Matthew},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops.dagstuhl.de/entities/document/10.4230/LIPIcs.AFT.2023.25},
  URN =		{urn:nbn:de:0030-drops-192144},
  doi =		{10.4230/LIPIcs.AFT.2023.25},
  annote =	{Keywords: blockchain, decentralized finance, Uniswap v3, liquidity provision, stochastic gradient descent}
}
Document
Invited Talk
DOI: 10.4230/OASIcs.Tokenomics.2021.6
Dynamic Posted-Price Mechanisms for the Blockchain Transaction Fee Market (Invited Talk)

Authors: Matheus V. X. Ferreira, Daniel J. Moroz, David C. Parkes, and Mitchell Stern

Published in: OASIcs, Volume 97, 3rd International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2021)

Abstract
In recent years, prominent blockchain systems such as Bitcoin and Ethereum have experienced explosive growth in transaction volume, leading to frequent surges in demand for limited block space and causing transaction fees to fluctuate by orders of magnitude. Existing systems sell space using first-price auctions; however, users find it difficult to estimate how much they need to bid in order to get their transactions accepted onto the chain. If they bid too low, their transactions can have long confirmation times. If they bid too high, they pay larger fees than necessary. In light of these issues, new transaction fee mechanisms have been proposed, most notably EIP-1559, aiming to provide better usability. EIP-1559 is a history-dependent mechanism that relies on block utilization to adjust a base fee. We propose an alternative design - a dynamic posted-price mechanism - which uses not only block utilization but also observable bids from past blocks to compute a posted price for subsequent blocks. We show its potential to reduce price volatility by providing examples for which the prices of EIP-1559 are unstable while the prices of the proposed mechanism are stable. More generally, whenever the demand for the blockchain stabilizes, we ask if our mechanism is able to converge to a stable state. Our main result provides sufficient conditions in a probabilistic setting for which the proposed mechanism is approximately welfare optimal and the prices are stable. Our main technical contribution towards establishing stability is an iterative algorithm that, given oracle access to a Lipschitz continuous and strictly concave function f, converges to a fixed point of f.
Cite as

Matheus V. X. Ferreira, Daniel J. Moroz, David C. Parkes, and Mitchell Stern. Dynamic Posted-Price Mechanisms for the Blockchain Transaction Fee Market (Invited Talk). In 3rd International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2021). Open Access Series in Informatics (OASIcs), Volume 97, p. 6:1, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2022)

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@InProceedings{ferreira_et_al:OASIcs.Tokenomics.2021.6,
  author =	{Ferreira, Matheus V. X. and Moroz, Daniel J. and Parkes, David C. and Stern, Mitchell},
  title =	{{Dynamic Posted-Price Mechanisms for the Blockchain Transaction Fee Market}},
  booktitle =	{3rd International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2021)},
  pages =	{6:1--6:1},
  series =	{Open Access Series in Informatics (OASIcs)},
  ISBN =	{978-3-95977-220-4},
  ISSN =	{2190-6807},
  year =	{2022},
  volume =	{97},
  editor =	{Gramoli, Vincent and Halaburda, Hanna and Pass, Rafael},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops-dev.dagstuhl.de/entities/document/10.4230/OASIcs.Tokenomics.2021.6},
  URN =		{urn:nbn:de:0030-drops-159039},
  doi =		{10.4230/OASIcs.Tokenomics.2021.6},
  annote =	{Keywords: Blockchain, Posted-price mechanism, Credible, Incentive compatibility, Transaction fee market, first-price auction, EIP-1559}
}
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