The always-available liquidity of automated market makers (AMMs) has been one of the most important catalysts in early cryptocurrency adoption. However, it has become increasingly evident that AMMs in their current form are not viable investment options for passive liquidity providers. This is large part due to the cost incurred by AMMs providing stale prices to arbitrageurs against external market prices, formalized as loss-versus-rebalancing (LVR) [Milionis et al., 2022]. In this paper, we present Diamond, an automated market making protocol that aligns the incentives of liquidity providers and block producers in the protocol-level retention of LVR. In Diamond, block producers effectively auction the right to capture any arbitrage that exists between the external market price of a Diamond pool, and the price of the pool itself. The proceeds of these auctions are shared by the Diamond pool and block producer in a way that is proven to remain incentive compatible for the block producer. Given the participation of competing arbitrageurs to capture LVR, LVR is minimized in Diamond. We formally prove this result, and detail an implementation of Diamond. We also provide comparative simulations of Diamond to relevant benchmarks, further evidencing the LVR-protection capabilities of Diamond. With this new protection, passive liquidity provision on blockchains can become rationally viable, beckoning a new age for decentralized finance.

翻译：自动做市商（AMM）的持续可用流动性是早期加密货币普及的关键催化剂之一。然而，当前形式的AMM对被动流动性提供者而言已逐渐显露出非可行投资选择的特征。这主要源于AMM向套利者提供相对于外部市场价格的陈旧价格所产生的成本，该成本被形式化为"再平衡损失"（LVR）[Milionis等，2022]。本文提出Diamond协议——一种在协议层面保留LVR的自动做市协议，旨在协调流动性提供者与区块生产者的激励。在Diamond中，区块生产者通过拍卖机制获取捕获Diamond池外部市场价格与池内价格之间套利空间的权利。拍卖收益的分配方式经证明对区块生产者保持激励相容性。由于竞争性套利者参与LVR的捕获，Diamond中的LVR被最小化。我们正式证明了该结论，并详述了Diamond的实现方案。通过将Diamond与相关基准模型进行对比模拟，进一步验证了其LVR保护能力。借助这种新型保护机制，区块链上的被动流动性提供将具备理性可行性，从而开启去中心化金融的新纪元。