Avalanche-based decentralized finance (DeFi) protocol Trader Joe claims he may have found a way to mitigate one of DeFi’s biggest weaknesses – fickle loss.
In a new white paper released Tuesday, titled JOE v2 Liquidity Book, authored by quant developers and researchers Adam Sturges, TraderWaWa, Hanzo and software engineer Louis MeMyself, the developers co-outlined the use of Liquidity Book (LB). an additional variable fee swap feature to “offer traders trades with little or no slippage”.
/4 Temporary loss
One of the most critical problems of Uniswap V3 is that the fickle loss often exceeds the swap fees.
A study conducted by @Bancor team showed that 50% of Uniswap V3 LPs lose money.
Liquidity Book solves this problem by introducing variable swap fees.
— The DeFi Investor (@TheDeFinvestor) August 23, 2022
Trader Joe said the new strategy will mitigate the temporary loss “that so many liquidity providers (LPs) on other DEXs suffered during the market turmoil.”
A temporary loss that has been considered one of DeFi’s greatest weaknesses occurs when the price of tokens changes after being deposited into a liquidity pool-based automated market maker as part of yield farming – a type of investment where lending tokens earning rewards (not the same as staking).
According to Markus Thielen, chief investment officer of digital asset management firm IDEG, this is also one of the reasons institutional investors have been cautious in the DeFi space.
Speaking to Cointelegraph, Thielen said that his firm and other institutional investors “have looked less at automated market makers (AMMs) because the risk of temporary loss is too high,” he added:
“I have to admit that Trader Joe’s v2 white paper offers a novel idea and liquidity providers have generated 30 basis points for trade facilitation, which is an attractive return when future growth for the industry is uncertain. We want to see how much liquidity v2 attracts now and how Trader Joe’s TVL will improve.”
Thielen added that to gain a competitive edge in the digital asset space, investors need to look for alternative investments with good fundamentals, rather than just relying on blue-chip assets:
“As a crypto fund, we can’t rely solely on ETH and BTC, we want other layered coins and altcoins to thrive, so we applaud Trader Joe’s team for keeping development and other AMM on their toes.”
According to the paper, Trader Joe’s Liquidity Book (LB) is a type of liquidity pool (LP) that organizes an asset pair’s liquidity into price bins that are exchanged at a constant price.
The LB introduces a new variable swap fee designed to protect traders from temporary losses by compensating LPs in the event of extreme market volatility so liquidity can be managed more efficiently in response to sudden price movements.
Trader Joe’s LB will also offer trades with zero to low slippage, which will serve to provide traders with better buy prices.
If executed correctly, this can represent a significant breakthrough in DeFi. A recent study showed that over 50% of Uniswap v3 LPs lose money during times of market turbulence because the temporary loss exceeds the swap fees.
The wait is finally over….
Introducing the Liquidity Book
A next generation AMM protocol that is highly efficient, flexible and built for #DeFihttps://t.co/6l2FoaJ0xo
— Trader Joe | New AMM Soon (@traderjoe_xyz) August 22, 2022
Thorchain is another DeFi protocol that offers impermanent loss protection for LP deposits 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 top of the Avalanche smart contract platform.
Related: Trader Joe (JOE) makes a 110% V-shaped recovery after launching Rocket Joe
The protocol is currently the largest decentralized exchange (DEX) on Avalanche with a total value of $191 million (TVL) for the protocol.
The DeFi protocol allows users to trade, farm, lend and participate, among other things.
Trader Joe’s token, JOE, saw a brief surge in price following the release of the whitepaper and is trading at $0.28 at the time of writing, though it’s still 94.5% off its all-time high, according to CoinMarketCap.
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