- Uniswap’s model automatically rebalances prices, giving arbitrageurs profit-making opportunities at the expense of LPs
- Arbitrageurs on Uniswap make more money than LPs despite taking on less risk
- Mooniswap fixes this with a unique model that maximizes LP profits
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Mooniswap, a new automated market maker (AMM) launched by 1inch exchange, helps liquidity providers double up as arbitrageurs and capture even more profits. Estimates conclude this can result in 50-200% more profits for LPs relative to Uniswap.
1inch Exchange Turns Liquidity Providers into Arbitrageurs
Anton Bukov, a co-founder of 1inch exchange, dug into the data and discovered that arbitrageurs on Uniswap make more money than LPs do. Considering the risk LPs take on by depositing their tokens in a smart contract and facing impermanent loss head-on, the risk-adjusted return for arbitrageurs is much higher.
Despite this trade-off, liquidity provision is vital for the success of any DEX. Launched by 1inch exchange, Mooniswap is designed to optimize this situation by allowing LPs to reap the rewards of slippage.
When a trade is executed on Uniswap, the pool automatically rebalances as per Uniswap’s equation. This immediate reaction from the protocol creates an arbitrage opportunity for traders at the expense of LPs.
DEX arbitrage competition is cutthroat, and participants must immediately jump on existing opportunities to secure a profit.
To mitigate this opportunity, Mooniswap introduces a five-minute delay factor to reduce profits for arbitrageurs. Unlike Uniswap, a trade on Mooniswap from 1inch doesn’t cause a liquidity pool to rebalance automatically.
This competitive environment, combined with a delayed price change on Mooniswap, results in smaller profits for arbitrageurs. LPs thus capture a portion of the slippage as their profits.
1inch estimates Mooniswap LPs can earn 50-200% more than a Uniswap LP. If this is true, and Mooniswap is as permissionless as Uniswap, it can become a “liquidity black hole” and steal market share from many incumbents in the DEX market.