LVR measures impermanent loss but considers rebalancing as a more reassuring way of measuring costs incurred by investors.

WHY DOES REBALANCING MATTER?

The issue is that cost is incurred when an arbitrageur trades, but post-arbitrageur’s activity, the pool applies rebalancing, thereby buying back what was lost initially at the current market price, returning the pool back to its initial equilibrium and mitigating the impermanent loss. But this was not considered in our initial calculations.

There are two methods of calculating LVR:

CASE 1:

LVR = a(p – q), 
where: 
a denotes the quantity of liquidity sold in the trade, 
p denotes the market price at that time, and 
q denotes the per-unit price of the AMM trade.

The above formula is used on a per trade basis and is accumulated over time, e.g. daily, weekly…

It is very important to note that no major insights were drawn from the analysis, the analysis is just a means to show how efficiently the formula works and how it can be a useful tool to liquidity providers and dev team.

CASE 2:

LVR = σ²/8
where:
σ = price volatality = standard deviation(daily % price change)

This measures the volatility of the tokens in the pool and uses this rate to check if the cost incurred can be easily balanced by percent fees charged on each trade on the pool.

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