Researchers propose defensive rebalancing to save $10B+ in AMM liquidity

Defensive rebalancing is a new mechanism for constant-function market makers (CFMMs) that transfers assets directly between pools, bypassing standard trading protocols. The paper proves that any arbitrage-prone configuration can be rebalanced to an arbitrage-free one that strictly increases some CFMMs' liquidities without reducing others — and that a configuration is arbitrage-free exactly when it is Pareto efficient under rebalancing. For log-concave trading functions, including constant product market makers, finding the optimal arbitrage-free rebalancing that maximizes global liquidity while leaving no participant worse off becomes a convex optimization problem with a unique, computationally tractable solution. The framework extends to mixed rebalancing, where a subset of CFMMs combines direct transfers with standard trades to reach an arbitrage-free state while harvesting arbitrage profits from non-participating CFMMs and price oracle market makers like centralized exchanges. Authors Sam Devorsetz and Maurice Herlihy present this as a rigorous foundation for future AMM protocols that proactively defend liquidity providers against arbitrage.