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<p>Decentralized Finance (DeFi) has automated market making (AMM) as a dominant. It allows decentralized exchanges to operate via liquidity pools. Crypto assets are traded in automatic way without any control by market makers with two types of agents: traders and liquidity providers (LPs). This paper develops a comprehensive framework for analyzing and pricing LP positions in protocol Uniswap. We demonstrate that an LP’s position exhibits option-like characteristics and derive closed-form pricing formulas. Our empirical analysis of ETH-USDC returns reveals heavy-tailed distributions with significant asymmetry, indicating greater downside risk. Importantly, we show that concentrated liquidity in Uniswap V3 generates substantially higher returns compared to uniform liquidity in V2. The pricing models presented enable precise valuation of these novel financial instruments, allowing them to launch on the market.</p>

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Liquidity provider position analysis and pricing in automated market making systems

  • 期刊论文

  • 发表日期：

    2026年3月11日

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  • Grigoriy Korolev

摘要

Decentralized Finance (DeFi) has automated market making (AMM) as a dominant. It allows decentralized exchanges to operate via liquidity pools. Crypto assets are traded in automatic way without any control by market makers with two types of agents: traders and liquidity providers (LPs). This paper develops a comprehensive framework for analyzing and pricing LP positions in protocol Uniswap. We demonstrate that an LP’s position exhibits option-like characteristics and derive closed-form pricing formulas. Our empirical analysis of ETH-USDC returns reveals heavy-tailed distributions with significant asymmetry, indicating greater downside risk. Importantly, we show that concentrated liquidity in Uniswap V3 generates substantially higher returns compared to uniform liquidity in V2. The pricing models presented enable precise valuation of these novel financial instruments, allowing them to launch on the market.