DeFi
Mitigate losses or rebalance? | Messari
LVR occurs when cryptocurrency prices fluctuate continuously off-chain but are periodically updated on-chain, leading to arbitrage opportunities that force liquidity providers to transact at outdated prices, representing an opportunity cost. Solutions include order flow auctions, such as those used by CoW AMMs, which auction off the right to arbitrage and align on-chain prices with off-chain prices, although participation is limited. Another solution is dynamic fees for AMMs, adjusting trading fees based on market data to potentially increase LP returns, with targeted approaches involving higher fees for toxic order flow. Despite these strategies, LVR-focused AMMs have struggled to gain significant market share, with CoW AMMs and Ambient together accounting for less than 1% of Uniswap volume, raising concerns about their long-term viability and the ability of dynamic fee AMMs to create a competitive advantage.
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