Problem Description
Against popular belief, arbitrageurs cannot trade against infinite liquidity at Binance mid price. Thus, we should develop a theory of arbitrage and LVR under bounded liquidity. Knowing how value is distributed among DEX LPs, CEX market makers, arbitrageurs and platforms gives a more holistic picture.
This is partially a theoretical problem but also comes with obvious empirical questions to answer: it is likely that existing empirical work systematically overestimates taker P&L. Thus, we should try to have more accurate estimation reflecting the real cost of liquidity to these actors. On the flip side this might also give us more accurate estimates of market maker P&L.
