LiqBoost: Enhancing Liquidity Provision for Blockchain-based Decentralized Exchanges

Abstract

Liquidity management in decentralized exchanges (DEXs) is a crucial research area in the blockchain industry due to its fundamental role in facilitating efficient trading of cryptocurrencies and fostering market stability. However, existing DEXs often face challenges related to liquidity management, which hinders their widespread adoption and effectiveness. This paper introduces Liq-Boost, a novel liquidity provision scheme specifically tailored for Uniswap V3, one of the leading DEX platforms. Our approach focuses on dynamically reallocating the positions of Liquidity Providers (LPs). Simulations using historical transaction data from Uniswap V3 demonstrate that LiqBoost significantly reduces trading costs for traders and enhances incentives for LPs compared to the status quo of Uniswap V3. We detail the system design for on-chain implementation of LiqBoost, leveraging the existing Uniswap V3 framework. This underscores the practicality and effectiveness of LiqBoost within the decentralized finance (DeFi) landscape.

Keywords: Blockchain, Decentralized exchange, System modeling, Incentive analysis, Liquidity management