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Market Completeness and Arbitrage-Free Pricing in DeFi

Published onOct 05, 2019
Market Completeness and Arbitrage-Free Pricing in DeFi

From analysis of uniswap markets: fees for liquidity provision should be = (pair volatility)2/8.

Abstract goal: get a no-arbitrage condition -- a situation where all relevant assets are priced appropriately and there is no way for one’s gains to outpace market gains w/o taking more risk.

Caveat: practical considerations (gas auction dynamics, uncertain risk-free rate, oracle problems) will get in the way + be more significant.

Q: isn’t the utility of the underlying asset one of the caveats? Imagine people are using ETH for computation; would that dominate these considerations?
A: doesn’t matter here; unless you assume there is no stable market value at all. ‘Valueless assets’ would work differently.

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