Game-Theoretic Analysis of Market Microstructure in Concentrated Liquidity Decentralized Exchanges

A study models liquidity provision behavior in concentrated liquidity decentralized exchanges as a mean field game, deriving a critical volatility rate with no fitting parameters above which liquidity provision becomes unprofitable. This critical volatility can be calculated solely from fee tiers, trading volume, active tick liquidity, and price. Verified using two and a half years of hourly data from 5 WETH/USDC pools on Ethereum and Base, it aligns with realized volatility trends. On the Ethereum 0.3% fee tier pool, the ratio of realized volatility to critical volatility is less than 1, indicating an optimal liquidity range width.