What Is Loss-Versus-Rebalancing (LVR)?
In decentralised finance, loan-versus-rebalancing refers to form of arbitrage that occurs whenever an AMM decentralised exchange has an outdated (stale) price in comparison to some other trading venue.
For liquidity providers (LP) this can be seen as toxic order flow, which eats their profits.
Arbitrageurs exploit this difference by trading from the AMM, like Uniswap, to the more liquid exchange (usually a centralized exchange like Binance), correcting the arbitrage and extracting value from LPs in the process.
In the worst case, centralised exchanges can themselves exploit this difference, if they have a priviledged access to their own order book and MEV.
See:
Original research from the Columbia University: Automated Market Making and Loss-Versus-Rebalancing
It is not possible to get rid of LVR completely, but it can be mitigated e.g. with
Shorter block times: arbitrage difference cannot grow that big
Price oracles: By fetching the price from a centralised exchange, it is not possible to have a price difference
Batch auctions: Instead of clearing market taker traders right away, short very high frequency auctions where multiple orders are matches and batches together, like CowSwap does
See also: