Impermanent Loss: Vegaswap Solutions
Vegaswap is an AMM built with multichain in mind enabling a wide range of Defi and Cross-chain applications.
If you’re reading this article, you’ve likely encountered the DeFi economy, including stablecoins, margin trading, lending, borrowing, and staking, among many others. It is also possible that the term impermanent loss is not new to you. But what does it mean? What is the process that leads to farming profits being cropped?
Impermanent loss is the loss in value when a liquidity provider provides assets to a liquidity pool and the prices of the assets change compared to when they were deposited. The more significant the change, the more the LP is exposed to impermanent loss. Loss, in this case, refers to the lower dollar value at the time of asset withdrawal than at the time of deposit. This loss is behind the motivation for Vegaswap.
Fully grasping and understanding the concept of impermanent loss and its effects may take some time; however, it is essential that every LP account for its effects. It can covertly eat into profits, surprising the LP at the time of withdrawal.
For example, an LP may decide to deposit 200 $ABC, initially valued at $0.01 per $ABC. From the activities of the DeFi platform, the user ends up earning 300$ ABC, bringing their total to 500$ABC. Because of market factors and other influencing parameters, the price of $ABC drops to $0.001. The user, while withdrawing, expects to have $ABC worth $5; however, they discover that their $ABC is only worth $0.5! A very unwelcome surprise, to say the least, for our farmer.
Creating goal-oriented liquidity providers
The goal of any LP is simple, to increase their token holding. Unfortunately, the current state of DeFi denies LP the chance to do so effectively.
Vegaswap, through its platform, proposes features that will help orient LP to maximize on earning more tokens from liquidity pools. The first approach is an overhaul of the existing liquidity pool system by providing a more customizable setup for users. Smart Pools, as proposed by Vegaswap, redefines liquidity pools, giving them more purpose.
The platform allows its users to create different pool types covering various trading pairs. Creating the smart pools is also made extremely simple. With just one click, users can create their custom liquidity pools. Smart Pools will also feature a custom pricing function enabling users to protect their tokens while still aiming for profits.
A significant cause of impermanent loss is the inadequacy of information and the passive participation of LP. Smart Pools enables a system that keeps the LP appropriately informed of the changing market trends by keeping them via active market participation through customizable options. These options encourage smart pool creators to consider market factors when customizing their pricing, selecting their tokens, and creating their pools. This is especially important when trading new tokens.
Vegaswap’s protocols substantially minimize impermanent loss risks
Exchanging new tokens in the market is fundamentally different as opposed to trading established tokens. They are a probable source for impermanent loss due to their expected high volatility, hence creating cautious trading parameters. Controlling the trading parameters of new tokens is essential in preserving the value of the assets staked by LP.
Therefore, through Vegaswap’s proposals, it is likely that LP will commit to liquidity pools, having customized them to meet their trading parameters towards achieving a set goal.
The second approach Vegaswap provides is Dynamic Pricing which bases on the differences between stable and high volatile assets. The mentioned assets should not be traded with a constant fee and curve, but instead, we need to define their own unique algorithm. Therefore, the goal of dynamic pricing is to maintain a stabilized transaction price and an optimized pool fee, which results in the most profit possible. By promoting constant token movements, Vegaswap can help mitigate impermanent loss.
Achieving constant token moving also means having numerous token trading options; multichain support is, therefore, a necessity for Vegaswap. The plethora of tokens supported by the platform removes trading limitations often seen in platforms with limited trading pairs. More trading pairs translate to more trading options, thus widening the trading pool accessible to users.
The highlighted factors enabled by Vegaswap are essential in creating goal-oriented liquidity providers. Vegaswap provides a platform with all the trading tools necessary to profit from automatic market makers.
A more reliable and profitable platform
Vegaswap deals with the problem of impermanent loss by giving more control to liquidity pool creators. The platform deliberately gives its users the tools to be in control throughout their trading/holding experience on Vegaswap. Through its adjustable parameters on Smart Pools, the platform encourages users to have more control of the liquidity pool and streamline token earnings.
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