With these new features Curve Finance is pushing the envelope of what’s possible with decentralized finance (DeFi). Their newly launched yield basis (YB) mechanism aims to completely free yield farmers from impermanent loss. The system leverages 200% overcollateralization and an innovative token model. In this model, customers are rewarded for making the best choices depending on the state of the market. The purpose behind this is to reduce impermanent loss risk when providing liquidity on AMMs.
Impermanent loss, according to Egorov, the founder of Curve Finance, occurs as a result of mathematical dependency. This dependency is due to the square root dependence on an asset’s price. This reliance leads LPs to incur impermanent loss when the price of deposited assets changes.
The YB token is at the heart of this mechanism as it should be especially in bull markets. Users are further incentivized to hold YB tokens, expecting the market price to appreciate as the broader market trends upward. This increases demand for the token which in turn causes further appreciation and stabilization of the token’s value.
In bear markets, the system motivates users to move into more stable returns, mostly in Bitcoin. This subtle but important strategic shift has the effect of lowering the circulating supply of YB tokens. It further reduces selling pressure and ensures the continued well-being of the Curve Finance ecosystem.
This new mechanism aims to counter token inflation by dynamically changing incentives based on positive and negative market sentiment. The system imposes an incentive for ecosystem participants to accumulate YB tokens during bullish market conditions. In bearish conditions, it encourages them to look for safer assets, thus balancing the supply and demand of the token.
In short, the YB mechanism guarantees value accrues to the YB token itself, rewarding its holders. This dual incentive structure is designed to provide a more balanced and ultimately sustainable environment for liquidity providers on Curve Finance.
