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Arbitrageurs' profits, LVR, and sandwich attacks: batch trading as an AMM design response

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  • Andrea Canidio
  • Robin Fritsch

Abstract

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).

Suggested Citation

  • 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.
    • Handle: RePEc:arx:papers:2307.02074
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    References listed on IDEAS

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    1. Andrea Canidio & Vincent Danos, 2024. "Commitment Against Front-Running Attacks," Management Science, INFORMS, vol. 70(7), pages 4429-4440, July.
    2. Matheus V. X. Ferreira & David C. Parkes, 2022. "Credible Decentralized Exchange Design via Verifiable Sequencing Rules," Papers 2209.15569, arXiv.org, revised Apr 2023.
    3. Lioba Heimbach & Ye Wang & Roger Wattenhofer, 2021. "Behavior of Liquidity Providers in Decentralized Exchanges," Papers 2105.13822, arXiv.org, revised Oct 2021.
    4. Joshua S. Gans & Richard T. Holden, 2022. "A Solomonic Solution to Ownership Disputes: An Application to Blockchain Front-Running," NBER Working Papers 29780, National Bureau of Economic Research, Inc.
    5. Jason Milionis & Ciamac C. Moallemi & Tim Roughgarden, 2023. "Automated Market Making and Arbitrage Profits in the Presence of Fees," Papers 2305.14604, arXiv.org.
    6. Agostino Capponi & Ruizhe Jia, 2021. "The Adoption of Blockchain-based Decentralized Exchanges," Papers 2103.08842, arXiv.org, revised Jul 2021.
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    Cited by:

    1. Matthew Willetts & Christian Harrington, 2024. "Rebalancing-versus-Rebalancing: Improving the fidelity of Loss-versus-Rebalancing," Papers 2410.23404, arXiv.org.
    2. Andrew W. Macpherson, 2024. "Do backrun auctions protect traders?," Papers 2401.08302, arXiv.org.
    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. Robin Fritsch & Andrea Canidio, 2024. "Measuring Arbitrage Losses and Profitability of AMM Liquidity," Papers 2404.05803, arXiv.org, revised Apr 2024.

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