LP - What is the true cost of providing Liquidity
What is LVR (Loss versus Rebalancing)?
A metric for calculating costs incurred by liquidity providers (LPs) in automated market makers (AMMs) like Uniswap
Measures adverse selection costs faced by LPs
Why LVR is Superior to Impermanent Loss:
More accurate measurement tool
Accounts for price volatility trajectory over time
Accumulates costs trade by trade (not just endpoint comparison)
How LVR Works:
Compares LP performance against a rebalancing reference strategy
Reference strategy mimics AMM trades on external, deep-liquidity markets
Uses mathematical models including Black-Scholes formula and asset volatility
Applications:
Forensically analyze past LP performance
Predict future LVR costs
Importance for AMM Design:
Critical for designers to properly incentivize LPs
Enables fee structures that scale appropriately with risk and volatility levels