Key Takeaways
Constant Function Market Makers (CFMMs) are a family of automated market makers that enable censorship-resistant decentralized exchange on public blockchains.
Trading fees have been proposed as a mechanism for compensating LPs for arbitrage losses. However, large fees reduce the accuracy of the prices reported by CFMMs and can cause reserves to deviate from desirable asset compositions.
This paper develops a framework for determining the value to LPs of supplying liquidity to a CFMM with fees when the underlying process follows a general diffusion.
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