According to MEV development organization Flashbots, JIT liquidity has been largely positive for traders who have seen increased liquidity in their trading range, minimizing slippage. TedDeFi reports.
MEV is not inherently bad and exists in any transaction fee market-driven chain with open access to the mempool. Decentralized exchanges and lending protocols even rely on MEV to arbitrage pools and liquidate undercollateralized loans in a competitive and efficient manner. The ability to order transactions within a block also casts a dark cloud over MEV because searchers are able to front run buy orders just to simultaneously sell on the trader after the order goes through.
This MEV tactic has proven more profitable on concentrated liquidity decentralized exchanges like Uniswap v3. Version 3 allows liquidity providers to supply capital within certain price ranges, theoretically improving trading depth around current prices and increasing fees for active liquidity providers. MEV searchers deploy their LP within a tight price range of the trade, taking up a significant amount of the trading fees and making the transaction worthwhile.
The strategy employs a non-atomic approach to MEV where searchers are exposed to delta risk, the chance that an asset drops in price. Therefore, the searcher must have some short-term outlook on the market because their portfolio was rebalanced from the trade, and future price volatility could quickly take away the profits made via trading fees.The Uniswap team foresaw the potential of JIT liquidity on v3, but wanted to see how the strategy affected traders and liquidity providers in actuality.
. Miller highlighted the benefits JIT liquidity brings to traders and how it differs from sandwich attacks, even while it employs a similar strategy. Furthermore, LPs have been able to remain profitable even despite JIT liquidity. Because the MEV searcher cannot utilize this strategy in a single atomic transaction, it is not risk-free and may not fit the bots risk profile.
A large concern is that MEV will continue to benefit the few at the expense of everyday DeFi users. Passive liquidity provision will continue to become more difficult if JIT liquidity strategies prove profitable, and trading on DEXs will be less desirable if users are being frontrun and sandwich-attacked. We run into some of the same problems as we see in traditional finance, withHowever, at both the protocol and application level MEV can and is being mitigated.
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