Equilibrium reward for liquidity providers in automated market makers

Journal article

Abstract:: We find the equilibrium contract that an automated market maker (AMM) offers to their strategic liquidity providers (LPs) in order to maximize the order flow that gets processed by the venue. Our model is formulated as a leader-follower stochastic game, where the venue is the leader and a representative LP is the follower. We derive approximate closed-form equilibrium solutions to the stochastic game and analyze the reward structure. The equilibrium strategies we find characterize the scenarios when LPs have incentives to add liquidity to the pool. The equilibrium contract depends on the external price, the pool reference price, and the pool reserves. Our framework offers insights into AMM design for maximizing order flow while ensuring LP profitability.

Files:: Aqsha_et_al_2026_Equilibrium_reward_for.pdf

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Language:: English
Keywords:: principal agent

design

fees

automated market makers

leader-follower games

noise trading

arbitrageurs

optimal contract

Stackelberg equilibrium
Pubs id:: 2410286
Local pid:: pubs:2410286
Deposit date:: 2026-04-22
ARK identifier:: ark:/29072/ora_69f8b8f6730d49b7b68c692ef17eeb9f

Copyright holder:: Aqsha et al
Rights statement:: © 2026 The Author(s). Mathematical Finance published by Wiley Periodicals LLC. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

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