Automated market makers (AMMs) invariably present their Liquidity Providers (LPs) with convexity costs. Hedging does not eliminate or even reduce these costs but it does lower volatility. With lower cost volatility, an LP does not need as much capital to cover these losses, so considering capital is expensive, it is correct to say hedging reduces costs, though only indirectly.
Hedging Negative Convexity
Hedging Negative Convexity
Hedging Negative Convexity
Automated market makers (AMMs) invariably present their Liquidity Providers (LPs) with convexity costs. Hedging does not eliminate or even reduce these costs but it does lower volatility. With lower cost volatility, an LP does not need as much capital to cover these losses, so considering capital is expensive, it is correct to say hedging reduces costs, though only indirectly.