Decentralized finance using blockchain technology is attracting attention as the next generation of finance. However, examples of its use are limited, and there are many issues such as legislation, safety, and lack of knowledge among users.

This joint research aims to contribute to solving these issues. The joint research will combine the company's on-chain data analysis and decentralized finance knowledge with the university's research team's knowledge in the field of traditional finance.

Decentralized finance gained many users at the 2021 DeFi Summer, but many challenges were also found. Internationally, institutions such as the Hong Kong University of Science and Technology [1], the Oxford Mann Institute for Quantitative Finance [2], Columbia University [3], and ETH Zurich [4] are conducting research in this area. Further systematic academic basic research is needed, and our research team is committed to contribute to the development of the industry.

Decentralized finance is a generic term for financial applications on the blockchain. It refers to various financial services that utilize smart contract technology (technology that operates processes according to the application) on the blockchain with cryptographic asset settlement functions (remittance, balance confirmation, etc.).

A decentralized exchange is a trading system that does not involve a central authority, where transactions are managed by blockchain and smart contracts. Transactions in a decentralized exchange are executed automatically by smart contracts and do not require matching of individual buy and sell orders like order book.

Uniswap v3, the largest decentralized exchange in decentralized financial applications, offers users the ability to exchange with low slippage, but requires liquidity providers to incur high operating costs.

Uniswap v3 offers multiple fee pools for the same currency pair, allowing liquidity providers to choose their fees based on market conditions. However, changing commission pools is not easy. In addition, impermanent losses during price fluctuations often result in net losses. In this environment, the attractiveness of liquidity provision declines, the number of users decreases, and the incentive to provide liquidity also declines, creating a vicious cycle.

In order to solve these problems, we are working on formulating a decentralized exchange system, organizing the issues, and building a sustainable model. Specifically, we will formulate existing decentralized exchange models, sort out issues in the ecosystem, and construct a sustainable model that takes into account transaction fees, incentive structures for liquidity providers, etc., and verify its practicality. Through these studies, we aim to achieve sustainable development of decentralized exchanges and maximize user benefits.

Founded in 1991 with the mission of further developing Hong Kong's economy and society, the University is a research-oriented university, ranked 7th in Times Higher Education's Asian University Rankings, and as its name suggests, is not only internationally renowned in the fields of science and technology, but also in business and management. In the field of business and management, the university is ranked No. 1 in the world in the global EMBA rankings (Financial Times EMBA Rankings, 2022) and No. 1 in Asia in the business school research rankings (University of Texas at Dallas Top 100 Business School Research Rankings 2023), and is regarded as one of the leading research institutions in the region.

In the field of decentralized finance, a variety of new services are emerging every day. Analyzing how these services work, what social benefits they provide, what problems they face, and what solutions are needed is both an exciting academic challenge and of great practical importance. It is a valuable opportunity to work with a service provider like Next Finance Tech, who has a high level of expertise in decentralized finance, to advance this kind of research. I am looking forward to doing our best to contribute to the progress of this field.

Focusing on the theoretical and empirical aspects of decentralized financial systems, our research will provide insight into the future of the financial world. Existing financial systems are complex and regulated, with aspects that cannot be captured by theoretical approaches, and data can be difficult to interpret in terms of people's behavior.
Decentralized financial systems, on the other hand, are still largely unregulated and allow users to shape and evolve the system in an open-source.
We look forward to working with Next Finance Tech to explore in depth the fascinating aspects of decentralized financial systems and provide new insights into what kind of new economies will be created.

All of us are very excited to have this opportunity to collaborate with one of Asia's leading universities with a long history and tradition. In particular, we recognize that the liquidity supply mechanism, which forms the basis of any decentralized exchange (DEX), is an important issue for us to research over the medium to long term. Although there are still very few studies in this field from the perspective of academia, both domestically and internationally, HKUST and our company are determined to pave the way as the pioneers in this field.

[1] Aoyagi, J., & Ito, Y. (2021). Coexisting Exchange Platforms: Limit Order Books and Automated Market Makers (SSRN Scholarly Paper 3808755). https://doi.org/10.2139/ssrn.3808755
[2] Cartea, Á., Drissi, F., & Monga, M. (2022). Decentralised Finance and Automated Market Making: Execution and Speculation. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4144743
[3] Milionis, J., Moallemi, C. C., & Roughgarden, T. (2023). Complexity-Approximation Trade-offs in Exchange Mechanisms: AMMs vs. LOBs (arXiv:2302.11652). arXiv. https://doi.org/10.48550/arXiv.2302.11652
[4] Heimbach, L., Schertenleib, E., & Wattenhofer, R. (2022). Risks and Returns of Uniswap V3 Liquidity Providers. Proceedings of the 4th ACM Conference on Advances in Financial Technologies, 89–101. https://doi.org/10.1145/3558535.3559772

Next Finance Tech Co., Ltd. is a company that operates a financial product development, a research business and a management system development on decentralized finance based on qualitative and quantitative analysis of blockchain and protocols as a research institute for decentralized finance.