Yield Basis is a new Curve Finance protocol. Implementing this novel, cross-chain solution is expected to minimize impermanent loss for liquidity providers of tokenized versions of Bitcoin and Ether. Curve founder Dr. Michael Egorov told Cointelegraph that Yield Basis solves the impermanent loss problem that has plagued liquidity providers for years and repels prospective entrants. The protocol functions through compounding leverage. It does this by holding positions that are perpetually exactly 200% overcollateralized and improving them with crvUSD, a decentralized stablecoin pegged 1:1 to the US dollar that the user can borrow.
Impermanent loss occurs when the value of tokens deposited in a liquidity pool diverges from the value of holding those tokens outside the pool. This mainly occurs in times of high price volatility, resulting in losses for liquidity providers known as impermanent loss.
According to Dr. Egorov, impermanent loss occurs when funds in a liquidity pool are directly affected by fluctuations in Bitcoin’s price. This linkage is in fact linear with the sqrt(BTC value). Yield Basis removes this square root issue at the core of impermanent loss.
"Impermanent losses happen because of this square root dependency. So, we really want to get rid of the square root. How do we get rid of the square root? The best way mathematically to get rid of the square root is to square it." - Dr. Egorov
Yield Basis takes a market-based approach to token inflation and emissions. Under these speculative bull market conditions, a typical user would only ever prefer to hold and stake the YB token to capture price appreciation. In long-lasting bear markets, Yield Basis provides the best value waiting to be accrued to the YB token.
"In different market conditions, you need to do different things." - Dr. Egorov
Yield Basis impermanent loss problem at its core. With new, dynamic tokenomics, it seeks to encourage more liquidity providers into the Curve Finance ecosystem.
