Automated Market Makers (AMMs) have revolutionized decentralized finance (DeFi), yet Liquidity Providers (LPs) often face concerns regarding Loss-Versus-Rebalancing (LVR). Research, including studies by Ciamac Moallemi and others, frames LVR as a problem, suggesting that passive LPs consistently underperform compared to active trading strategies. However, in The Fedz ecosystem, LP passivity is not a bug but a feature.

LVR research highlights that LPs lose value relative to an active trader who continuously rebalances their portfolio. This phenomenon occurs because:

• Arbitrageurs extract value from LP positions when market prices move.

• LPs provide liquidity at non-optimal prices, leading to consistent slippage losses.

• Dynamic rebalancing is required to maximize returns, making passive LPs inherently inefficient under conventional AMM structures.

From a market efficiency standpoint, this is often viewed as a flaw, arguing that LPs need sophisticated active management to avoid consistent underperformance.

The Fedz challenges the notion that LP efficiency should be measured solely by profit maximization. Instead, LPs in The Fedz ecosystem play a fundamentally different role: establishing long-term trust and communication in the stability of FUSD. Unlike traditional AMMs, where LPs prioritize trading fees, The Fedz LPs have a vested interest in maintaining the FUSD peg to the Dollar. This is reinforced by The Fedz NFT holders, who act as long-term liquidity providers with a strategic focus on systemic stability rather than short-term gains. As a result, the dynamic shifts from a zero-sum competition between LPs and arbitrageurs to a mutually beneficial model. In that model LPs, as FUSD issuers, work alongside arbitrageurs to ensure market resilience.

Here’s why passivity is an intentional strength:

1. Pre-committed Liquidity Absorbs Market Stress – Unlike arbitrage-driven LPs, The Fedz LPs serve as a liquidity buffer during times of crisis, ensuring that FUSD remains stable even under heavy market pressure.

2. Private Liquidity Pools (PLPs) Enforce Liquidity Commitments – The Fedz introduces PLPs, where LPs lock liquidity at predefined price levels to maintain stability, instead of optimizing for profit. This mitigates short-term arbitrage losses by prioritizing systemic resilience.

3. Aligning LP and Arbitrageur Incentives – In The Fedz model, arbitrageurs are not competing against LPs but rather working in tandem with them. Since LPs are inherently invested in FUSD’s long-term stability, arbitrageurs serve as a stabilizing force rather than mere profit extractors. This transforms the relationship from adversarial to cooperative.

4. Reducing Dependence on External Arbitrageurs – Traditional AMMs rely on external actors (arbitrage traders) to maintain pricing. The Fedz model internalizes stability mechanisms, ensuring that liquidity remains deep and reliable even when external arbitrage fails.

Rather than treating LPs as profit-seeking traders, The Fedz treats them as market infrastructure that underpins financial stability. The contrast with LVR-focused research is clear:

• LVR research assumes LPs should optimize returns → The Fedz prioritizes liquidity stability over return maximization.

• LVR sees arbitrage-driven loss as inefficiency → The Fedz views it as the cost of maintaining a stable financial system.

• LVR models encourage dynamic rebalancing → The Fedz promotes liquidity commitments that protect against panic-driven volatility.

• LVR treats LPs and arbitrageurs as opponents → The Fedz aligns their interests, making arbitrageurs essential partners in market stability.

The Fedz presents a paradigm shift in LP design, moving away from short term profit optimization and toward stability-first liquidity provisioning. Unlike conventional AMMs that view passive LPs as inefficient, The Fedz embraces LP passivity as a safeguard against liquidity crises.

By embedding long-term incentives and aligning LP and arbitrageur interests, The Fedz moves beyond the outdated framework of AMM competition. In a world where financial crises are inevitable, stability is important as efficiency. The Fedz LP model ensures that FUSD doesn’t just survive volatility but thrives in it.

Automated Market Makers (AMMs) have revolutionized decentralized finance (DeFi), yet Liquidity Providers (LPs) often face concerns regarding Loss-Versus-Rebalancing (LVR). Research, including studies by Ciamac Moallemi and others, frames LVR as a problem, suggesting that passive LPs consistently underperform compared to active trading strategies. However, in The Fedz ecosystem, LP passivity is not a bug but a feature.

LVR research highlights that LPs lose value relative to an active trader who continuously rebalances their portfolio. This phenomenon occurs because:

• Arbitrageurs extract value from LP positions when market prices move.

• LPs provide liquidity at non-optimal prices, leading to consistent slippage losses.

• Dynamic rebalancing is required to maximize returns, making passive LPs inherently inefficient under conventional AMM structures.

From a market efficiency standpoint, this is often viewed as a flaw, arguing that LPs need sophisticated active management to avoid consistent underperformance.

The Fedz challenges the notion that LP efficiency should be measured solely by profit maximization. Instead, LPs in The Fedz ecosystem play a fundamentally different role: establishing long-term trust and communication in the stability of FUSD. Unlike traditional AMMs, where LPs prioritize trading fees, The Fedz LPs have a vested interest in maintaining the FUSD peg to the Dollar. This is reinforced by The Fedz NFT holders, who act as long-term liquidity providers with a strategic focus on systemic stability rather than short-term gains. As a result, the dynamic shifts from a zero-sum competition between LPs and arbitrageurs to a mutually beneficial model. In that model LPs, as FUSD issuers, work alongside arbitrageurs to ensure market resilience.

Here’s why passivity is an intentional strength:

1. Pre-committed Liquidity Absorbs Market Stress – Unlike arbitrage-driven LPs, The Fedz LPs serve as a liquidity buffer during times of crisis, ensuring that FUSD remains stable even under heavy market pressure.

2. Private Liquidity Pools (PLPs) Enforce Liquidity Commitments – The Fedz introduces PLPs, where LPs lock liquidity at predefined price levels to maintain stability, instead of optimizing for profit. This mitigates short-term arbitrage losses by prioritizing systemic resilience.

3. Aligning LP and Arbitrageur Incentives – In The Fedz model, arbitrageurs are not competing against LPs but rather working in tandem with them. Since LPs are inherently invested in FUSD’s long-term stability, arbitrageurs serve as a stabilizing force rather than mere profit extractors. This transforms the relationship from adversarial to cooperative.

4. Reducing Dependence on External Arbitrageurs – Traditional AMMs rely on external actors (arbitrage traders) to maintain pricing. The Fedz model internalizes stability mechanisms, ensuring that liquidity remains deep and reliable even when external arbitrage fails.

Rather than treating LPs as profit-seeking traders, The Fedz treats them as market infrastructure that underpins financial stability. The contrast with LVR-focused research is clear:

• LVR research assumes LPs should optimize returns → The Fedz prioritizes liquidity stability over return maximization.

• LVR sees arbitrage-driven loss as inefficiency → The Fedz views it as the cost of maintaining a stable financial system.

• LVR models encourage dynamic rebalancing → The Fedz promotes liquidity commitments that protect against panic-driven volatility.

• LVR treats LPs and arbitrageurs as opponents → The Fedz aligns their interests, making arbitrageurs essential partners in market stability.

The Fedz presents a paradigm shift in LP design, moving away from short term profit optimization and toward stability-first liquidity provisioning. Unlike conventional AMMs that view passive LPs as inefficient, The Fedz embraces LP passivity as a safeguard against liquidity crises.

By embedding long-term incentives and aligning LP and arbitrageur interests, The Fedz moves beyond the outdated framework of AMM competition. In a world where financial crises are inevitable, stability is important as efficiency. The Fedz LP model ensures that FUSD doesn’t just survive volatility but thrives in it.