According to Trader Joe, the impermanent loss problem in the avalanche-based decentralised finance protocol may be resolved.
On Tuesday, the developers published a white paper titled the JOE v2 Liquidity Book describing the use of Liquidity Book (LB) with a variable fee swap to “provide traders with zero or low slippage trades.” Adam Sturges, TraderWaWa, Hanzo, and Louis MeMyself were the Quant developers and researchers who wrote the paper.
Trader Joe says the new approach will reduce transient losses that liquidity providers (LPs) have suffered on other DEXs amid market instability.
As part of yield farming, a strategy in which one loans tokens to earn incentives, a token may suffer temporary loss when its price fluctuates after being deposited in a market maker with a liquidity pool. This has been considered one of the biggest vulnerabilities of DeFi (not staking).
Institutional investors have been treading carefully in DeFi because of this, says Markus Thielen, Chief Investment Officer at IDEG.
/3 When swaps are performed, the funds available in a liquidity bin are exchanged at a constant price.
If a swap requires more liquidity than is available in the current bin, it will move to the next bin.
LPs can concentrate liquidity around a price range delimited by 2 bins.
— The DeFi Investor (@TheDeFinvestor) August 23, 2022
How much is the loss?
According to Thielen, “the risk of temporary loss is too high,” so he and other institutional investors have avoided automated market makers.
This is a huge advancement in DeFi if done correctly. However, according to a recent survey, almost 50% of Uniswap v3 LPs experience financial losses under volatile market conditions since temporary losses outweighed swap revenues.LP deposits are temporarily protected by Thorchain, another DeFi protocol, after the first 100 days (partially protected before then).Based on Avalanche smart contracts, the Trader Joe protocol calls itself a “one-stop decentralised trading platform.”