Avalanche finds a way to mitigate the risk of impermanent loss of DeFi

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Avalanche-oriented decentralised finance (DeFi) protocol Trader Joe claims to have discovered a way to eliminate one of the flaws of decentralised finance (DeFi). This is about the impermanent loss. On Tuesday, a whitepaper on the subject was published. It's known as the JOE v2 Liquidity Book. It was co-written by Quant developers Adam Sturges, TraderWaWa, Hanzo, and software engineer Louis MeMyself.

As stated in the whitepaper, "Liquidity Book (LB) is a novel design for structuring the liquidity of a decentralized exchange. It allows liquidity to be discretized into fixed price bins, improving slippage and swap pricing. Unlike prior concentrated liquidity protocols, LB avoids high impermanent loss to liquidity providers. LB liquidity structures allow for further composability and we are keen to explore new use cases with the DeFi community."

This initiative, according to Trader Joe, will mitigate the impermanent loss 'suffered by so many liquidity providers (LPs) on other DEXs during market turbulence.' One of DeFi's most serious flaws has been an impermanent loss. This occurs when a token's price fluctuates following a deposit in a liquidity pool-oriented market maker as part of yield farming. It's also one of the reasons why institutional investors have been cautious in the DeFi space.

The Liquidity Book (LB) at Trader Joe's is a type of liquidity pool (LP). Its goal is to secure an asset pair's liquidity into price bins that are exchanged at a constant price. The developers described how to use Liquidity Book (LB) with a variable fee swap feature. This feature will 'provide traders with zero or low slippage trades.'

This will allow traders to have access to better buying rates. This follows a recent study that found that more than half of Uniswap v3 LPs lose money during market turbulence due to impermanent loss going over the swap fees. As analysed by anonymous DeFi analyst The DeFi Investor on Twitter, "One of the most critical issues of Uniswap V3 is that impermanent loss often exceeds swap fees. A study effectuated by the @Bancor team showed that 50% of Uniswap V3 LPs lose money. Liquidity Book solves this problem by introducing variable swap fees."