About AMM

Bel2433

"As widely known, most Uni v3 liquidity providers (LPs) have suffered losses due to the ""adverse selection"" of orders resulting from their backward selection. Therefore, in the past year, there has been an increasing amount of analysis and discussion on this topic.

At Stanford, Jason Milionis, Ciamac Moallemi, and Tim Roughgarden discussed Loss and Rebalancing (LVR). Besides impermanent loss, this is another way to analyze the cost of providing liquidity in an AMM (Automated Market Maker). LVR represents DEX-CEX arbitrage profits and is also equivalent to LP losses.

LVR ≈ Arbitrage - LP fees ≈ Arbitrage / Trade Probability (when fees are high or trading intervals are short), as DEX-CEX arbitrage profits are small, the likelihood of trades is low."