Arbitrage Extractable Value
Liquidity Providers (LPs) for Automated Market Makers (AMMs) suffer from “impermanent loss” – yet no definition of impermanent loss exists that allows it to be quantified precisely. In this presentation, Anthony Lee Zhang (University of Chicago) proposes to define the loss from AMM liquidity provision as Arbitrage Extractable Value (AEV). AEV is equal to the “slippage” incurred by AMM LPs, from trading at prices worse than centralized exchange prices. AEV is equal to the profits arbitrageurs make from AMM-CEX arbitrage.
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