Market Neutral Liquidity Provision

Authors

DOI:

https://doi.org/10.5195/ledger.2024.389

Keywords:

Decentralized Finance (DeFi), Risk Management, Liquidity Provision, Automated Market Makers

Abstract

Automated Market Makers with concentrated liquidity have to date achieved market dominance among competing spot trading AMM models in Decentralized Finance. We shift the prevalent research focus on liquidity providers’ loss metrics, such as Impermanent Loss or Loss-Versus-Rebalancing, to a market neutral strategy. We derive a hedge portfolio which allows for concentrated liquidity provision while maintaining market neutrality. We present an example of the hedge portfolio and highlight the practical restrictions. The hedge portfolio consisting of options and futures requires a significant capital outlay compared to the amount of liquidity provided, but typically earns carry from futures contango.

Author Biographies

Basile Maire, Quantena AG

Dr. Basile Maire is the co-founder of Quantena AG, a software company that specializes in Risk Management and Financial Engineering with a focus on blockchain applications. Basile has over 15 years of experience in financial engineering and risk management, spanning asset liability management at a major Swiss commercial bank, leading a firm-wide risk modeling team as an Executive Director at UBS in New York, and advising blockchain companies. Basile holds a PhD in Banking and Finance from University of Zurich and a Master of Science in Computer Science from ETH Zurich.

Marcus Wunsch, ZHAW School of Management and Law

Dr. Marcus Wunsch is a researcher and senior lecturer at the ZHAW School of Management and Law, with a research focus in quantitative finance. After two postdocs in Kyoto and at the ETH, he gained seven years’ professional experience as an investment analyst at UBS and as a senior portfolio manager at Quantica Capital.

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Published

2024-11-15 — Updated on 2024-11-18

How to Cite

Maire, B., & Wunsch, M. (2024). Market Neutral Liquidity Provision. Ledger, 9. https://doi.org/10.5195/ledger.2024.389

Issue

Vol. 9 (2024)

Section

Research Articles

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Copyright (c) 2024 Basile Maire, Marcus Wunsch

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Revised 7/16/2018. Revision Description: Removed outdated link.