Avalanche-based decentralized exchange (DEX), Trader Joe (JOE), has launched a ‘liquidity book’ that introduces variable swap fees to deal with impermanent losses. In a newly released whitepaper on August 23 named the JOE v2 Liquidity Book, the developers outlined how the LB works to protect traders from losing money when they lend tokens.
According to the developers, the new feature will solve the impermanent loss problem many liquidity providers have suffered.
An Impermanent loss is one of DeFi’s greatest weaknesses. It occurs when the prices of tokens change after depositing in a liquidity pool-based automated market. This is called ‘yield farming’ and is normally done as an investment where users lend tokens to earn rewards. In most cases, Impermanent losses are more than swap fees. Trader Joe’s liquidity book offers zero to low slippage in trades, allowing users to get better buying rates.
Their LB introduces a new variable swap fee to protect traders from impermanent loss by paying LPs during extreme market volatility. This allows liquidity to be handled better in response to sudden price fluctuations. Trader Joe’s liquidity book places the liquidity of an asset pair into price bins to form a liquidity pool, which is exchanged at a constant price.
Implications For DeFi on Avalanche?
If this works out, it could be a massive breakthrough in the DeFi industry.
A recent study has shown that more than half of Uniswap V3 LPs make losses when token prices are unstable. Uniswap V3 generates the highest fees of any market marker (AMM), but the impermanent losses exceed the earned fees. The research suggested that liquidity providers are better off holding their assets.
Impermanent losses have caused institutional investors to tread carefully in the DeFi area. Speaking to Cointelegraph, IDEG’s main investment officer, Markus Thielen, said that his company has been less engaged in AMMs due to the high risks of impermanent loss.
“I will have to acknowledge that Trader Joe’s v2 whitepaper presents a novel concept and liquidity companies have produced 30bps for facilitating trades, which is an interesting return when foreseeable future progress is uncertain for the business.” – Markus Thielen – Main Investment Officer, IDEG.
He added that he would like to see how significantly liquidity v2 attracts users and how Trader Joe will improve it.