Automated Market Making and Loss-Versus-Rebalancing

Jason Milionis, Ciamac Moallemi, Tim Roughgarden and Anthony Lee Zhang

Papers from arXiv.org

Abstract: Automated Market Makers (AMMs) are both liquidity sources and investment vehicles for market participants. This paper analyzes the risks and returns of liquidity provision (LP) investments in AMMs. In a continuous-time model, we show that LP returns decompose into a beta-like component reflecting market risk exposure, and an alpha-like component reflecting microstructural forces: accrued fees minus losses to arbitrageurs. Applying our decomposition to the Uniswap v2 ETH-USDC pool, we find that over 99.991\% of LP return variance is driven by beta exposure to market risk

Date: 2022-08, Revised 2026-08
New Economics Papers: this item is included in nep-mst
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