V4 DEX intergration

Liquididty Providers of CF-AMM (constant function AMM) like Uniswap and PancakeSwap are facing two major problems:

• Loss versus Rebalancing (LVR) is a form of pLEV that occurs whenever an AMM has an outdated (stale) price in comparison to some other trading venue. Arbitrageurs exploit this difference by trading from the AMM to the more liquid exchange (usually a centralized exchange like Binance), correcting the arbitrage and extracting value from LPs in the process.

• Optimal Fee Problem involves finding the right balance for the trading fee percentage to maximize LPs earnings.

Additionally pTxEV exisist in the AMMs and part of it could be redirected to Liquidity Providers.

Arbiter V4 DEX Pool

Arbiter Solution is integrated with V4 DEXs using their hook mechanisms that allow for modification of swap logic. Arbiter introduces a privilege, that is auctioned while the proceeds are redistributed to Liquidity Providers. The privilege is:

• Managing trading fee that allows the auction winner to provide a function(smart contract) that sets the trading fee based on the swap input parameters and allows the holder to collect X% (5%) of the trading fees as a reward. Introducing this role creates a profit-driven competition for solving Optimal Fee Problem. Moreover, controlling fee allows winners to set 0-fee for themselvs. This partially solves the LVR as significant part of extracted arbitrage is redistributed in form of auction. On top of it, zero-fees create new arbitrage opportunities and give searcher/solver an advantage in searching/solving as they can perform fee-less swaps. This generates additional profits for winners that are partially shared with LPs. Possible Strategies:

  • Dynamic Fee Management Based on Market Conditions: By adjusting fees in response to market conditions, the Pool Arbiter can optimize liquidity provider yields. This dynamic management ensures that the pool remains competitive and profitable, attracting more liquidity.

  • Selective Fee Reduction for DEX Aggregators: To increase the pool’s trading volume, the Pool Arbiter can selectively lower fees for DEX Aggregator agents. This strategic move makes the pool more attractive to aggregators, boosting overall volume and Extractable Value.

  • Increasing Competitors’ Fees: Working Together with Pool Searcher to increase their competitor's fees.

  • Fee-less swaps for partners: Auction participant can partner with other experts and offer them lower fees. For example an actor specializing in DEX-CEX arbitrage can partner with searcher. They can set rules between them and both benefit on the privilege.

Optimizing Liquidity Provider Yields: A Positive Feedback Loop

The available Extractable Value in a pool is closely tied to the liquidity and volume within it. Therefore, it is in the auction winner's best interest to enhance Liquidity Providers' yields. By effectively managing fees and increasing yields:

• Increased Liquidity: Higher yields attract more liquidity to the pool.

• Higher Volume: Higher Liquididty leads to higher volume.

• Enhanced Extractable Value: More liquidity and volume results in greater Extractable Value.

Conclusion

The integration of Arbiter into V4 DEXs not only redirects Extractable Value to Liquidity Providers but also turns competition into a force for constructive growth. By leveraging the winners' strategic privileges, this integration creates a dynamic, positive feedback loop that enhances liquidity, increases yields, and ultimately drives the success of the pool liquidity providers and the winners. This innovation represents a significant step forward in DeFi, setting a new standard for how Extractable Value is managed and distributed within decentralized protocols.