How Do Arbitrageurs Benefit the Overall Health and Price Accuracy of a Constant Product AMM?

Arbitrageurs play a crucial role by ensuring the AMM's internal price reflects the external market price. When the AMM's price deviates, arbitrageurs execute trades that profit from the difference, simultaneously pushing the AMM's token ratio back toward the external market equilibrium.

This process of buying undervalued tokens and selling overvalued ones corrects the price, making the AMM more reliable and preventing excessive impermanent loss for LPs.