Just-in-time Liquidity on the Uniswap Protocol

Abstract

Just-in-time (“JIT”) liquidity is a liquidity provision strat- egy found in blockchain-based automated market makers like the Uniswap Protocol, where a liquidity provider (“LP”) mints and burns a concen- trated position immediately before and after a swap. There have been wide-spread concerns in the community about the potential adverse im- pact of JIT liquidity on the economic security of the system. In this paper, we study the market micro-structures that allow JIT transactions to take place. We show that JIT liquidity occurs rarely in practice, and when it does, JIT liquidity improves execution quality of the trader to whom liquidity is provided. Finally, we derive and validate a model of the price improvement offered by JIT liquidity, which we show to have an upper bound at twice the fee rate of the pool that JIT occurs in.

Keywords: Automated market maker, Liquidity provision, Uniswap