Overview

Problem Description

The current market structure creates inefficiencies in trading execution due to imbalances between passive (PLP) and just-in-time (JIT) liquidity provision, leading to:

• Reduced Trading Incentives

  • Traders hesitate to execute swaps when passive liquidity is insufficient or when JIT liquidity provision is uncertain. This results in lower trading volume, which reduces fees generated by LPs, ultimately diminishing overall system welfare.(include references and hypothesis testing)

• Excessive Price Impact for Large Orders

  • When JIT liquidity is scarce, large trades suffer significant slippage, as JIT liquidity providers (who react post-trade rather than preemptively) may strategically withhold liquidity to exploit price movements.(include references and hypothesis testing)

• Vulnerability to Predatory Behavior

  • In the absence of robust PLP, traders become exposed to opportunistic strategies by JIT, mirroring how high-frequency trading (HFT) firms traditionally front-run large orders in traditional markets (include references and hypothesis testing)

Solution Overview

A more balanced liquidity ecosystem where:

• PLP acts as a dependable baseline, reducing volatility and slippage.

• JIT liquidity complements (rather than dominates) market-making, preventing exploitative practices.

• Traders can execute large orders with confidence in fair pricing and minimal adverse selection.