IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2404.05803.html
   My bibliography  Save this paper

Measuring Arbitrage Losses and Profitability of AMM Liquidity

Author

Listed:
  • Robin Fritsch
  • Andrea Canidio

Abstract

This paper presents the results of a comprehensive empirical study of losses to arbitrageurs (following the formalization of loss-versus-rebalancing by [Milionis et al., 2022]) incurred by liquidity providers on automated market makers (AMMs). We show that those losses exceed the fees earned by liquidity providers across many of the largest AMM liquidity pools (on Uniswap). Remarkably, we also find that the Uniswap v2 pools are more profitable for passive LPs than their Uniswap v3 counterparts. We also investigate how arbitrage losses change with block times. As expected, arbitrage losses decrease when block production is faster. However, the rate of the decline varies significantly across different trading pairs. For instance, when comparing 100ms block times to Ethereum's current 12-second block times, the decrease in losses to arbitrageurs ranges between 20% to 70%, depending on the specific trading pair.

Suggested Citation

  • Robin Fritsch & Andrea Canidio, 2024. "Measuring Arbitrage Losses and Profitability of AMM Liquidity," Papers 2404.05803, arXiv.org, revised Apr 2024.
    • Handle: RePEc:arx:papers:2404.05803
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2404.05803
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Guillermo Angeris & Hsien-Tang Kao & Rei Chiang & Charlie Noyes & Tarun Chitra, 2019. "An analysis of Uniswap markets," Papers 1911.03380, arXiv.org, revised Feb 2021.
    2. 'Alvaro Cartea & Fayc{c}al Drissi & Marcello Monga, 2023. "Decentralised Finance and Automated Market Making: Predictable Loss and Optimal Liquidity Provision," Papers 2309.08431, arXiv.org, revised Jun 2024.
    3. Andrea Canidio & Robin Fritsch, 2023. "Arbitrageurs' profits, LVR, and sandwich attacks: batch trading as an AMM design response," Papers 2307.02074, arXiv.org, revised Feb 2024.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erhan Bayraktar & Asaf Cohen & April Nellis, 2024. "DEX Specs: A Mean Field Approach to DeFi Currency Exchanges," Papers 2404.09090, arXiv.org.
    2. Lyudmila Kovalchuk & Volodymyr Kostanda & Oleksandr Marukhnenko & Nataliia Kuchynska & Yuliia Marchuk, 2023. "The Method of Choosing Parameters for Margin Trading Protocols in the Constant Product Model," Mathematics, MDPI, vol. 11(19), pages 1-20, October.
    3. Thibaut Mastrolia & Tianrui Xu, 2024. "Clearing time randomization and transaction fees for auction market design," Papers 2405.09764, arXiv.org, revised Oct 2024.
    4. Andrew W. Macpherson, 2024. "Do backrun auctions protect traders?," Papers 2401.08302, arXiv.org.
    5. Guillermo Angeris & Alex Evans & Tarun Chitra, 2021. "Replicating Monotonic Payoffs Without Oracles," Papers 2111.13740, arXiv.org.
    6. Daniel Kirste & Niclas Kannengie{ss}er & Ricky Lamberty & Ali Sunyaev, 2023. "How Automated Market Makers Approach the Thin Market Problem in Cryptoeconomic Systems," Papers 2309.12818, arXiv.org, revised Sep 2023.
    7. Roger Lee, 2023. "All AMMs are CFMMs. All DeFi markets have invariants. A DeFi market is arbitrage-free if and only if it has an increasing invariant," Papers 2310.09782, arXiv.org, revised Dec 2023.
    8. Guillermo Angeris & Alex Evans & Tarun Chitra, 2023. "Replicating market makers," Digital Finance, Springer, vol. 5(2), pages 367-387, June.
    9. Daniele Maria Di Nosse & Federico Gatta, 2024. "A Multi-step Approach for Minimizing Risk in Decentralized Exchanges," Papers 2406.07200, arXiv.org, revised Jun 2024.
    10. Guillermo Angeris & Akshay Agrawal & Alex Evans & Tarun Chitra & Stephen Boyd, 2021. "Constant Function Market Makers: Multi-Asset Trades via Convex Optimization," Papers 2107.12484, arXiv.org.
    11. Vijay Mohan, 2022. "Automated market makers and decentralized exchanges: a DeFi primer," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-48, December.
    12. Marcello Monga, 2024. "Automated Market Making and Decentralized Finance," Papers 2407.16885, arXiv.org.
    13. Vidal-Tomás, David, 2023. "The illusion of the metaverse and meta-economy," International Review of Financial Analysis, Elsevier, vol. 86(C).
    14. C. Escudero & F. Lara & M. Sama, 2024. "Optimal Trade Characterizations in Multi-Asset Crypto-Financial Markets," Papers 2405.06854, arXiv.org.
    15. Agostino Capponi & Ruizhe Jia, 2021. "The Adoption of Blockchain-based Decentralized Exchanges," Papers 2103.08842, arXiv.org, revised Jul 2021.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2404.05803. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.