Automated Liquidity Provision on Robinhood Chain: Trading Fees, Price Risk and Token Launches

Abstract

The recently hyped launch of Robinhood Chain saw a massive influx of trading activity in its first few weeks. We present an automated system on Robinhood Chain designed to provide liquidity to its main exchange in return for a share of the trading fees. We tested it on the chain's full record and in a forward book. We show that the pool a provider chooses usually has a larger impact on whether providing liquidity pays than the price range at which it sets its liquidity. In an analysis of all relevant pools, providing liquidity in some of them earned more than holding the two underlying tokens, with 95% confidence. We then show how a short position on another venue hedges out the stock's direction, and project what the hedged trade earns if we start today. Finally, we discuss where the research goes next.