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Measuring Arbitrage Losses and Profitability of AMM Liquidity

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  • 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
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    References listed on IDEAS

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    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.
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