Measuring Arbitrage Losses and Profitability of AMM Liquidity

This paper presents the results of a comprehensive empirical study of losses to arbitrageurs (following the formalization of loss-versus-rebalancing or LVR by Milionis et al., 2022) incurred by liquidity on automated market makers (AMMs). Through a systematic comparison between historical returns from trading fees and losses to arbitrageurs, our findings indicate an insufficient compensation from fees for arbitrage losses across many of the largest AMM liquidity pools (on Uniswap). Remarkably, we identify a higher profitability among less capital-efficient Uniswap v2 pools compared to their Uniswap v3 counterparts.