Introduction Uniswap is the most popular AMM in DeFi. As of May 31st, 2022, Uniswap V3 had 4.01 billion USD of liquidity staked in its pools with a daily trading volume of 1.29 billion USD, while Uniswap V2 had 1.74 billion USD staked and a daily trading volume of 91 million…

A Better Way to Measure Pool Performance — Introduction The goal of this article is to show how Uniswap is not only a decentralized exchange for buying and selling digital assets but also a type of options market and therefore introduce excess implied volatility over historical or expected volatility as a better metric to judge an Uniswap pool’s performance…

Introduction In a previous article I showed how to calculate the expected impermanent loss from Uniswap V2 and V3. Since Uniswap is a type of options market that allows liquidity providers to enter a short volatility position, it is possible to derive an implied volatility from the formula of expected impermanent…

Introduction In a previous article I showed how to calculate impermanent loss in Uniswap V2. In this article I’ll show how to calculate expected impermanent loss in Uniswap V2 & V3. …

Introduction In the previous article I explained the source of returns from liquidity provision in Uniswap V2. I showed how liquidity provision carries a substantial amount of market risk, which although benefits the liquidity provider when prices move up, the benefits decrease the more prices rise, while the drawbacks also increase…

Introduction In the previous article I described how Uniswap V2 works. I explained how Uniswap V2 replicates the market impact events that happen in traditional order book exchanges by utilizing a constant function in its market maker algorithm. In summary, the substitution of one quantity for another happens at a sublinear…

Introduction Constant Function Market makers are innovative solutions to the problem of decentralized exchanges. In the years prior to the implementation of CFMMs in the Ethereum network, developers implemented decentralized exchanges by replicating solutions from the traditional financial industry. That is they built smart contracts that replicated order books and order…