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Session 3.13: Implied Impermanent Loss: A Cross-Sectional Analysis of Decentralized Liquidity Pools
Time:
Wednesday, 27/Aug/2025:
9:00am - 9:30am
Location:Mikado Conference hall
Meeting hall “Mikado”, which can accommodate up to 50 people
Presentations
Implied Impermanent Loss: A Cross-Sectional Analysis of Decentralized Liquidity Pools
Prof. Lorenzo Schoenleber1, Prof. Andrew Papanicolaou2, Prof. Tom Li3, Prof. Siddharth Naik4
1Collegio Carlo Alberto, Italy; 2North Carolina State University; 3NYU - Courant Institute of Mathematical Science; 4Independent Portfolio Managers
We derive an option-implied valuation of impermanent loss for liquidity providers on decentralized exchanges and quantify it based on traded option prices. We propose a model that values impermanent loss through the variance of the tokens' relative price. Since the relative price is not the price of a traded asset, we introduce a model for the distribution of the former and a valuation formula induced by a change of num'{e}raire. We show that impermanent loss arises from the tokens' individual risks and their correlation risk. These risks negatively impact pool sizes and explain the cross-sectional returns of liquidity pools.
