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It’s been a while since I published anything, but I’m back now!
Automated Market Makers (AMMs) are the lifeblood of decentralised finance (DeFi), empowering users to trade and provide liquidity on decentralised exchanges (DEXs). But as liquidity providers (LPs), we rarely hear about the hidden costs that can quietly eat into returns — costs like Loss Versus Rebalancing (LVR).
If you’re a liquidity provider or DeFi enthusiast and haven’t heard of LVR, this blog will walk you through why it’s a critical concept. More importantly, you’ll learn how LPs, protocol designers, and blockchain architects can begin addressing it to make DeFi ecosystems more efficient.
Let’s dive into the key findings and practical takeaways from this analysis presented at Devcon SEA 2024.
What Is Loss Versus Rebalancing (LVR), and Why Does It Matter?
So, what exactly is LVR? Simply put, LVR is the cost incurred by AMM LPs due to stale prices that are exploited by well-informed arbitrageurs.
LPs providing liquidity on DEXs are like living on an isolated island — they are unaware of price movements in the outside world, such as on centralised exchanges (CEXs). Arbitrageurs act as messengers, spotting…
