Michael Egorov, the founder of Curve has introduced a revolutionary decentralized finance (DeFi) plan. This new model addresses impermanent loss, one of the most profitable liquidity providers. This creative strategy allows providers to deliver a single token. They are able to borrow against that other, enabling them to stay net long the single asset while collecting trading fees. Egorov’s model provides a passive yield-earning mechanism without exposure to active trading or multi-asset exposure.
Egorov goes much deeper to provide a formula to estimate net APR, accounting for fees earned, cost of borrowing, and loss from rebalancing. Simulations of the strategy indicate potential APRs of 10–20% with single-sided exposure and lowered risk. Backtests covering the last six years show that Egorov’s strategy beats the usual Automated Market Maker (AMM) configurations.
Addressing Impermanent Loss
Impermanent loss occurs when the prices of tokens in a liquidity pool diverge by a large amount. That causes the value of a liquidity provider’s assets to fall even further than they would have by simply holding on to the tokens. Egorov’s solution removes impermanent loss risk by keeping the leverage level constant between the deposited and borrowed assets. This is accomplished by mainly exposing liquidity providers to only one of the tokens with the borrowed asset changing.
This makes things easier on liquidity providers’ end, thereby cutting down on the headache of juggling so many different assets. By starting with single-sided exposure, the strategy makes it easier for new entrants to join the DeFi ecosystem. In doing so, the model addresses the risks of best token holding a multisig or DAO-style portfolio of a variety of tokens.
The strategy’s intentional design continuously creates a stable and predictable environment for IPL liquidity providers. This endorsement creates a snowball effect, drawing greater public use and fiscal commitment to DeFi platforms. This stability is essential for the long-term expansion and health of decentralized finance communities. By minimizing the negative effects of impermanent loss, the DeFi protocols can build greater trust and confidence with their users.
Key Components of the Strategy
Egorov’s strategy stands on a potent idea. He gets the exposure he wants by supplying one token and borrowing another. This enables liquidity providers to efficiently earn trading fees while significantly reducing their exposure to impermanent loss. The model’s success is based on disciplined control of interest rate expense and loss on rebalancing.
Egorov’s formula makes estimating net APR much more precise. This provides liquidity providers prudent foresight into the potential profitability of their investments. Such transparency is obviously necessary to make good, informed decisions and maximize returns. This method is all about making that sweet, sweet passive income. It’s a tantalizing prospect for anybody who wants to generate yield and not have to be so hands-on with their investments.
Maximally depositing and borrowing against your assets is key. Through this mechanism, it is able to completely eliminate the risk of impermanent loss. This strategy provides the right balance to insulate liquidity providers from them. They do not seek to be overly exposed to the volatility of many tokens, thus hedging their risk. This new approach leads to a much more stable and predictable investment experience.
Performance and Implications
These six-year backtests provide further evidence for the robustness and effectiveness of Egorov’s strategy, indicating that it can consistently outperform traditional AMM setups. These results underscore the power of this new paradigm to transform the provision of liquidity in DeFi. In short, the outperformance indicates that it is possible to achieve better returns at a lower level of risk with this strategy.
The consequences of this strategy go far beyond each individual liquidity provider and threaten the integrity of the entire DeFi ecosystem. By addressing the challenge of impermanent loss, the strategy can help attract more participants and capital to DeFi platforms. This resulting boost in liquidity helps foster better trading conditions and increased efficiency in decentralized markets.
