DeFi and DEXes: Liquidity Book Model

Description

This lecture covers the journey of DeFi and DEXes, starting with the inception of AMMs and the development of the Liquidity Book model. It explains the concept of discretized bin architecture, surge pricing, and fungible liquidity in detail. The instructor discusses the evolution from Uniswap V2 to the Liquidity Book model, highlighting the advantages and features of the new approach.

Official source

https://mediaspace.epfl.ch/media/0_2f1reem4

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Related concepts (52)

Fungibility

In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts are indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for example, a

100 bill (note) can easily be exchanged for twenty

5 bills (notes). In contrast, non-fungible tokens cannot be exchanged in the same manner. For example, gold is fungible because its value does not depend on any specific form, whether of coins, ingots, or other states.

Volatility smile

Volatility smiles are implied volatility patterns that arise in pricing financial options. It is a parameter (implied volatility) that is needed to be modified for the Black–Scholes formula to fit market prices. In particular for a given expiration, options whose strike price differs substantially from the underlying asset's price command higher prices (and thus implied volatilities) than what is suggested by standard option pricing models. These options are said to be either deep in-the-money or out-of-the-money.

Volatility (finance)

In finance, volatility (usually denoted by σ) is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option).

Implied volatility

In financial mathematics, the implied volatility (IV) of an option contract is that value of the volatility of the underlying instrument which, when input in an option pricing model (such as Black–Scholes), will return a theoretical value equal to the current market price of said option. A non-option financial instrument that has embedded optionality, such as an interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a security.

Stochastic volatility

In statistics, stochastic volatility models are those in which the variance of a stochastic process is itself randomly distributed. They are used in the field of mathematical finance to evaluate derivative securities, such as options. The name derives from the models' treatment of the underlying security's volatility as a random process, governed by state variables such as the price level of the underlying security, the tendency of volatility to revert to some long-run mean value, and the variance of the volatility process itself, among others.