🚨 LPs are losing more than they think.
Impermanent Loss isn’t the only hidden cost.
AMMs are leaking arbitrage value - and arbitrageurs are capturing it.
Here’s how it happens (and why it needs to change):👇
1/ What’s the problem with today’s traditional AMM models?
In traditional AMM models, LPs provide liquidity to earn LP fees (gain side) as compensation for Impermanent Loss (loss side).
When prices revert to their original level to make Impermanent Loss equal zero, it may appear that LPs haven't lost anything.
However, in reality, LPs still incur Opportunity Value Loss, which is captured by arbitrage activity.
2/ What exactly is Opportunity Value Loss from Arbitrage?
Here is the short example:
- You add 1 ETH + 1,000 USDC at $1,000/ETH (full range).
- ETH doubles to $2,000 → Position shifts to ~0.707 ETH + 1,414 USDC, which is like selling ~0.293 ETH for $414. Normally it is rebalanced by arbitrageurs.
- If LPs actively rebalance, they can add 414 USDC, withdraw 0.293 ETH, and sell it elsewhere for 586 USDC.
- The $172 difference is Opportunity Value Loss from arbitrage (equal Impermanent Loss) in this simple case.
- When ETH returns to $1,000, your LP resets to 1 ETH + 1,000 USDC - like using 414 USDC to buy back ~0.293 ETH, while the market only needed $293 → $121 additional Opportunity Value Loss.
At endpoint: $293 of upside quietly handed to arbitrageurs - even though Impermanent Loss shows “zero”.
That silent leak repeats every price swing.
3/ Why it matters?
According to a research at the ACM Web Conference 2024, in the WETH-USDC 5bp pool on Uniswap v3, LP fee earnings is only ~80% of the opportunity value lost to arbitrage.
If LPs could capture that value instead of losing it to external arbitrageurs, their APR would rise significantly.
It’s time for AMMs that stop leaking value to external arbitragers.
#FairFlow is built to solve this.
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