macrocephalopod

Taking an expectation on both sides and dividing through by x to get a return, we get E(return) = E(tf) - sigma^2/4. If you have estimates for the turnover in the pool and the realized volatility, this tells your your expected return for providing liquidity over one time period.

If you set that expected return to zero you get an "implied volatility" of sigma = 2 * √E(tf). Unlike option implied volatility you can't observe this directly (only indirectly in the form of time-series averages of pool turnover) but you /can/ compare it to your estimate ...

... of realized volatility to determine whether providing liquidity in the pool is likely to be profitable or not. You can also calculate the "gamma" for the pool which tells you (a) how sensitive your P&L will be to price jumps and ...

... (b) how often you need to adjust your futures position to remain market neutral.

Some extensions to this - 1. In some liquidity pools you receive governance tokens for participating, which increase the yield (assuming you sell them) 2. You may pay or receive funding fees on the futures position, which should be added/subtracted from the liquidity fee yield

3. It costs money to adjust your futures hedge so you shouldn't re-hedge too frequently, there is probably an interesting avenue of research for "optimal delta hedging" in liquidity pools.

Ugh - I wanted to shout out another account that did a thread about viewing liquidity pool stakes as covered calls and trading liquidity tokens as options, but I can't find it now. If someone could please link it that would be very helpful!

did you type this up and then post it?