Replicating Monotonic Payoffs Without Oracles
In this paper, we show that any monotonic payoff can be replicated using only liquidity provider shares in constant function market makers (CFMMs), without the need for additional collateral or oracles. Such payoffs include cash-or-nothing calls and capped calls, among many others, and we give an explicit method for finding a trading function matching these payoffs. For example, this method provides an easy way to show that the trading function for maintaining a portfolio where 50% of the portfolio is allocated in one asset and 50% in the other is exactly the constant product market maker (e.g., Uniswap) from first principles. We additionally provide a simple formula for the total earnings of an arbitrageur who is arbitraging against these CFMMs.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Replicating Portfolios: Constructing Permissionless Derivatives
The current design space of derivatives in Decentralized Finance (DeFi) relies heavily on oracle systems. Replicating market makers (RMMs) provide a mechanism for converting specific payoff functions to an associated Con…
Valuation of contingent claims with short selling bans under an equal-risk pricing framework
This paper studies the valuation of European contingent claims with short selling bans under the equal risk pricing (ERP) framework proposed in Guo and Zhu (2017) where analytical pricing formulae were derived in the cas…
ERPGain-Loss Hedging and Cumulative Prospect Theory
Two acts are comonotonic if they yield high payoffs in the same states of nature. The main purpose of this paper is to derive a new characterization of Cumulative Prospect Theory (CPT) through simple properties involving…
Robust XVA
We introduce an arbitrage-free framework for robust valuation adjustments. An investor trades a credit default swap portfolio with a risky counterparty, and hedges credit risk by taking a position in defaultable bonds. T…
Characterizing the Feasible Payoff Set of OLG Repeated Games
We study the set of (stationary) feasible payoffs of overlapping generation repeated games that can be achieved by action sequences in which every generation of players plays the same sequence of action profiles. First, …