Curve founder Michael Egorov’s plans to reduce the risk of impermanent loss, a major fear in decentralized finance (DeFi). As one side makes a strong rally—the winner of the bout—Curve’s system is meant to borrow against the winner and buy the loser. This mechanism does a nice job of ramping up exposure to the outperformer while not exhausting depth.
Egorov is quick to point out that the pain from impermanent loss is completely voluntary. His statement appears at a moment when DeFi has been waiting with bated breath for its own Lehman moment. Either event could wipe out several months of yield and scare capital into stagnation.
The system currently being implemented has the ability to wreak havoc. This kind of damage might destroy months of yield for liquidity providers. It could scare capital into passivity.
Egorov is promising open code for the new system. It is now promising conservative parameters pre-mainnet launch. These steps are designed to instill confidence and provide peace of mind that user funds are safeguarded.
Curve’s solution to impermanent loss is through a dynamic system. This new system compensates for positions with booming markets in an automated way. Second, when one of the assets in the pool starts to outperform the other, the system borrows the outperforming asset. It then leverages it to buy the dog of an asset that is underperforming.
This ongoing rebalancing act allows insurers to keep their payout ratio within a reasonable range across the entire pool. This feature supplementally lowers the exposure of liquidity providers to impermanent loss. With both growing exposure to the outperformer, while not bleeding depth dry, the system is designed to maximize upside, while limiting downside potential losses.
Egorov’s commitment to transparent code and conservative parameters is a testament to the importance of building trust within the DeFi community. By being open about these aspects, you empower your users to make informed decisions and understand how the system works. Conservative parameters don’t allow for aggressive driving, making sure that the system is always working within a safe margin.
