Viable Pool Sizing for On-Chain FX Liquidity: Amplification, Capital, and Resilience
2026-08-31 • Computational Engineering, Finance, and Science
Computational Engineering, Finance, and Science
AI summaryⓘ
The authors study how financial institutions can best set up on-chain foreign exchange (FX) liquidity pools to balance capital commitment, trading costs, and profitability. They analyze the StableSwap mechanism, which adjusts between two types of market makers using an amplification factor, but find that neither extreme is ideal for institutions due to capital inefficiency or risks during shocks. Using mathematical models, they identify combinations of amplification and pool size that meet requirements for good pricing, positive returns, and resilience to market shocks. They also find practical limits on pool size and amplification to avoid excessive losses or liquidity drain.
StableSwapconstant-product market makerconstant-sum market makeramplification factoron-chain liquidityMerton jump-diffusionimpermanent lossslippagereturn on capitalliquidity pool design
Authors
Ryan Fang, Ivan Bardziyan, Jessica Wang, Mayank Anand
Abstract
Financial institutions deploying on-chain FX liquidity face a joint design problem: how much capital to commit, and how to configure the pool, to remain both competitive on trading costs and profitable as a liquidity provider? The StableSwap mechanism (Egorov, 2020) interpolates between constant-product (CPMM) and constant-sum (CSMM) market makers (Port and Tiruviluamala, 2022) via an amplification factor A, but neither extreme suits institutional FX: CPMM pools require excessive capital and generate high impermanent loss; CSMM pools are capital-efficient near the peg but drain rapidly under adversarial flow. Using a Merton jump-diffusion price process (Merton, 1976) and the loss-versus-rebalancing (LVR) framework (Milionis et al., 2022), we map the joint (A, TVL) space to identify configurations that satisfy all three institutional requirements: competitive slippage, positive return, and shock resilience. Minimum viable pool size scales approximately as TVL/Q = 1000/A; ROC at that minimum is thin (about 0.054% per horizon) and independent of A; low-A pools (A <= 10) suffer slippage exceeding 200 bps under a 10x shock, while high-A pools (A >= 500) suffer reserve drain up to 60%, establishing both a capital floor and a practical amplification ceiling.