2026-10-03T23:27:03Z https://drops.dagstuhl.de/oai

oai:drops-oai.dagstuhl.de:27866 2026-10-02T17:40:22Z ddc:004 open_access

Defensive Rebalancing in Networks of Automated Market Makers Devorsetz, Sam Herlihy, Maurice Automated Market Makers Arbitrage Convex Optimization This paper introduces and analyzes defensive rebalancing, a novel mechanism for preventing arbitrageurs from extracting surplus from networks of constant-function market makers (CFMMs). A rebalancing transfers assets directly from one CFMM’s pool to another’s, bypassing the CFMMs' standard trading protocols. In any arbitrage-prone configuration, we prove there exists a rebalancing to an arbitrage-free configuration that strictly increases the liquidity of at least one participating CFMM without decreasing the liquidity of any other participating CFMM. Moreover, we prove that a configuration is arbitrage-free if and only if it is Pareto efficient under rebalancing. We prove that for any log-concave trading function, including the ubiquitous constant-product market maker, finding an optimal arbitrage-free rebalancing that maximizes the aggregate liquidity of the participating CFMMs while preserving each participant’s liquidity can be formulated as a convex optimization problem with a unique, computationally tractable solution. We extend this framework to mixed rebalancing, where a subset of participating CFMMs use a combination of direct transfers and standard trades to transition to an arbitrage-free configuration while capturing arbitrage opportunities from non-participating CFMMs and external price-setting oracles such as centralized exchanges. Our results provide a rigorous foundation for future CFMM protocols that coordinate defensive rebalancing to internalize arbitrage surplus within networks of CFMMs. Schloss Dagstuhl – Leibniz-Zentrum für Informatik Sam Devorsetz and Maurice Herlihy 2026 Is Part Of LIPIcs, Volume 395, 8th Conference on Advances in Financial Technologies (AFT 2026) InProceedings Text doc-type:ResearchArticle publishedVersion application/pdf doi:10.4230/LIPIcs.AFT.2026.12 urn:nbn:de:0030-drops-278665 https://drops.dagstuhl.de/entities/document/10.4230/LIPIcs.AFT.2026.12 eng https://creativecommons.org/licenses/by/4.0/legalcode