DeFi

Trader Joe Offers Impermanent Loss Mitigation Method

Trader Joe, avalanche-based decentralized finance (DeFi) protocol, claims to have discovered a means to minimize one of DeFi’s most serious flaws: impermanent loss.

The developers outlined the use of Liquidity Book (LB) with an additional variable fee swap feature to “provide traders with zero or low slippage trades” in a newly released white paper on Tuesday called the JOE v2 Liquidity Book, authored by Quant developers and researchers Adam Sturges, TraderWaWa, Hanzo, and software engineer Louis MeMyself.

Trader Joe said the new strategy will mitigate impermanent loss “suffered by so many liquidity providers (LPs) on other DEXs during market turbulence.”

Impermanent loss occurs when the price of token changes after depositing it in a liquidity pool-based automated market maker as part of yield farming, which is a sort of investment in which one lends tokens to collect incentives.

According to Markus Thielen, a chief investment officer of digital asset management firm IDEG, this is one of the reasons institutional investors have been cautious in the DeFi area. Thielen said:

“I must admit that Trader Joe’s v2 whitepaper offers a novel idea and liquidity providers have generated 30bps for facilitating trades, which is an attractive return when future growth is uncertain for the industry. We want to see how much liquidity v2 is now attracting and how Trader Joe’s TVL will improve.”

According to the paper, Trader Joe’s Liquidity Book (LB) is a sort of liquidity pool (LP) that organizes an asset pair’s liquidity into price bins that are traded at a fixed price.

The LB proposes a new variable swap fee to safeguard traders from temporary loss by paying LPs in the event of significant market volatility, allowing liquidity to be handled more efficiently in response to abrupt price fluctuations.

Trader Joe’s LB will also offer zero to low slippage trades, allowing traders to get better buying rates.

If done correctly, this might be a big breakthrough in DeFi. According to a recent study, more than half of Uniswap v3 LPs lose money during market turmoil since the temporary loss exceeds the swap fees.

THORChain is another DeFi system that provides LP deposits with permanent loss protection after the first 100 days (with partial protection before that point).

The Trader Joe protocol bills itself as a “one-stop decentralized trading platform” built on the Avalanche smart contract platform. With $191 million in total value locked (TVL) on the protocol, it is presently the largest decentralized exchange (DEX) on Avalanche.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Harold

CoinCu News

Harold

With a passion for untangling the complexities of the financial world, I've spent over four years in financial journalism, covering everything from traditional equities to the cutting edge of venture capital. "The financial markets are a fascinating puzzle," I often say, "and I love helping people make sense of them." That's what drives me to bring clear and insightful financial journalism to the readers of Coincu.