Measuring Arbitrage Losses and Profitability of AMM Liquidity
Robin Fritsch, Andrea Canidio
TL;DR
This work investigates whether liquidity providers on automated market makers earn enough from trading fees to offset arbitrage losses caused by stale prices, using the loss-versus-rebalancing ($LVR$) framework. It empirically compares Uniswap v2 and v3 pools by simulating arbitrage against Binance prices and computing historical fees over 2022–2023, while also analyzing how block-time affects arbitrage profitability. The findings show that, for many large pools, fees do not fully offset $LVR$, with Uniswap v2 often more profitable for passive LPs than v3; arbitrage losses decline as block times shorten, in a pair-dependent manner. These results have practical implications for AMM design and blockchain architectures, highlighting sustainability concerns for LPs and opportunities to adjust block-time or liquidity-design features to improve profitability.
Abstract
This paper presents the results of a comprehensive empirical study of losses to arbitrageurs (following the formalization of loss-versus-rebalancing by [Milionis et al., 2022]) incurred by liquidity providers on automated market makers (AMMs). We show that those losses exceed the fees earned by liquidity providers across many of the largest AMM liquidity pools (on Uniswap). Remarkably, we also find that the Uniswap v2 pools are more profitable for passive LPs than their Uniswap v3 counterparts. We also investigate how arbitrage losses change with block times. As expected, arbitrage losses decrease when block production is faster. However, the rate of the decline varies significantly across different trading pairs. For instance, when comparing 100ms block times to Ethereum's current 12-second block times, the decrease in losses to arbitrageurs ranges between 20% to 70%, depending on the specific trading pair.