It's got DeFi buzzing. The promise? Eliminate impermanent loss (IL) for BTC and ETH LPs. Sounds fantastic, right? So, before we anoint Curve the savior of DeFi, let’s look a little bit closer. It is time for us to learn the truth about what is going on.
Impermanent Loss Finally Vanquished?
Impermanent loss is a pain. You contribute your tokens to a liquidity pool. Prices change and all of a sudden you’re stuck with a smaller stack than if you had simply left them in your own pocket. Yield Basis claims to address this issue with leveraged overcollateralization. They’re shooting for a 200% cushion, taking on debt crvUSD to increase the margin. This method increases the cost of your movement against your collateral by 2x. It additionally removes the square root impact that normally causes impermanent loss.
Unfortunately, Dr. Egorov seems to be painting a very optimistic picture of automated regulation and automated rebalancing. Let’s face it, just because something is automated doesn’t mean it’s infallible. Imagine getting into a self-driving car during rush hour on the 405 freeway.
I prefer to imagine it in the context of homeownership. Consider when you purchase a home with a mortgage (aka, a leveraged position). If the housing market crashes, you’ll still owe the loan. Your property’s lost value can’t make up for the difference. Yield Basis would do a lot to make sure that doesn’t happen, but the risk of a repeat market crash always exists.
crvUSD: Savior or Systemic Risk?
crvUSD is the keystone. That’s the borrowed asset supporting all of these leveraged plays. What happens if crvUSD loses its peg? If the stablecoin crashes, the entire house of cards may go teetering. It’s akin to constructing a tall building on an unstable base.
The protocol generates yield, paid out in either tokenized BTC/ETH or the Yield Basis (YB) token. These advocates contend that this market-based inflation control provides room for value to be accrued. Bull market? Get YB tokens. Bear market? Grab the BTC. Sounds slick. Not only that, it requires perfect market timing and entirely rational actors. Are we being rational when the markets are moving so irrationally?
Imagine it as the Federal Reserve combating inflation. They make adjustments to interest rates, ideally trying to point the economy in one direction or another. Because every now and then, the market just does what the market wants to do.
Complexity Hiding Existential Risks?
Here is where my center-right center cautiousness comes in. While DeFi is known for its spirit of innovation, there are times when complexity merely hides risk. Yield Basis is not simple. The average LP isn’t going to understand leveraged overcollateralization and market-based inflation targeting. This effectively creates an information asymmetry, putting the most vulnerable and least sophisticated users at risk.
What about gas fees? Leveraging and rebalancing constantly will cost you. If so, are those fees justified, particularly for the smaller LPs?
Here's the cold, hard truth: there's no such thing as a free lunch in DeFi. While Yield Basis can help prevent impermanent loss, it does come with an entirely new set of risks.
This chart shows exactly how Yield Basis can be liquidated if the price of Bitcoin drops by 10% (assuming a 200% overcollateralization ratio and a hypothetical debt ceiling for crvUSD):
| Bitcoin Price Drop | Collateral Value | Debt (crvUSD) | Health Ratio | Liquidation Risk? |
|---|---|---|---|---|
| 0% | $100 | $50 | 2.00 | No |
| 5% | $95 | $50 | 1.90 | No |
| 10% | $90 | $50 | 1.80 | Potentially/Yes* |
Liquidation risk is high if protocol parameters are lax or market conditions are extreme. The health ratio is simplified for illustration.
Ultimately, Yield Basis is a clever solution. But it's not a magic solution. As always, do your own research. Understand the risks. And don't blindly trust the hype. DeFi’s success will lay not in the quick ‘next shiny object,’ but instead, in responsible innovation.
Ultimately, Yield Basis is a clever solution. But it's not a magic solution. As always, do your own research. Understand the risks. And don't blindly trust the hype. DeFi's future depends on responsible innovation, not just chasing the next shiny object.
