How Do AMMs with Dynamic Fees Adjust to Mitigate the Impact of Arbitrage on Liquidity Providers?

AMMs with dynamic fees adjust their fee structure based on market conditions, primarily volatility. When volatility is high, the AMM automatically increases the trading fees.

This has a dual effect: it disincentivizes arbitrageurs by making their trades more expensive, and it compensates liquidity providers for the increased risk of impermanent loss. This helps to create a more stable and profitable environment for LPs during periods of high market turbulence.