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.
Glossar
Dynamic Fee Structure
Adjustment ⎊ A dynamic fee structure within cryptocurrency, options trading, and financial derivatives represents a pricing model where fees are not static, but rather respond to prevailing market conditions and individual trader behavior.
Amms
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEx) design, moving away from traditional order book models to a constant function market mechanism.
Dynamic Fees
Adjustment ⎊ Dynamic fees represent a mechanism where transaction costs automatically adjust in response to prevailing market conditions, such as volatility or trade size.