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Arbitrageurs' profits, LVR, and sandwich attacks: batch trading as an AMM design response
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We study a novel automated market maker design: the function maximizing AMM (FM-AMM). Our central assumption is that trades are batched before execution. Because of competition between arbitrageurs, the FM-AMM eliminates arbitrage profits (or LVR) and sandwich attacks, currently the two main problems in decentralized finance and blockchain design more broadly. We then consider 11 token pairs and use Binance price data to simulate the lower bound to the return of providing liquidity to an FM-AMM. Such a lower bound is, for the most part, slightly higher than the empirical returns of providing liquidity on Uniswap v3 (currently the dominant AMM).
Forward citations
Cited by 2 Pith papers
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Strategic Analysis of Just-In-Time Liquidity Provision in Concentrated Liquidity Market Makers
A transaction-level optimization model shows that JIT liquidity providers on Uniswap V3 could raise profits by up to 69% by accounting for price impact, but optimized JIT activity would cut passive LP fee income by up...
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Optimal Fees for Liquidity Provision in Automated Market Makers
Optimal AMM fees sit just below all-in CEX trading costs in normal markets, rise with volatility, and become effectively infinite (halt trading) in extreme volatility.
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