A new approach to solving Impermanent Loss?
Automated Market Maker (AMM) users are losing billions of dollars every year to Impermanent Loss. A recent academic study also pointed out that around 50% of Uniswap v3 liquidity providers (LPs) experienced negative returns.
So far, we have seen some AMM protocols trying to tackle the issue of Impermanent Loss, like Bancor and its insurance system. Bancor chose not to directly address Impermanent Loss but rather to hedge from this risk.
Swaap and its groundbreaking Matrix Market Maker try to directly solve Impermanent Loss and become the very first market-neutral Automated Market Maker, unlocking more efficiency for DeFi by limiting arbitrage trading.
Swaap could be a blessing for both Liquidity Providers & Traders as Cyrille Pastour, co-founder of Swaap Labs, said “Impermanent Loss negatively impacts both LPs returns and trading fees. By natively addressing it, Swaap is a crucial step towards wider DeFi adoption.”
With Swaap, Liquidity Providers have now the opportunity to earn passive yields without worrying about Impermanent Loss.
What is Impermanent Loss?
Impermanent loss is a loss of money experienced by Liquidity Providers on traditional AMM due to divergence between asset prices in a pool. The main reasons behind this phenomenon are the design of traditional AMM that use the constant product formula to balance their pool and the fact that they do not integrate off-chain information.
This leads to arbitrage situations that benefit arbitragers at the expense of liquidity providers.
For instance, if you invest 1 ETH & 1000 DAI in a pool when 1 ETH = 1000 DAI, here is the impermanent loss you would experience.
Traditional AMM try to compensate for Impermanent Loss by charging high fees to traders. So the Impermanent Loss problem becomes an issue for both Liquidity Providers and Traders, with the only winners being arbitragers.
How Does Swaap Solve Impermanent Loss?
The core idea of Swaap is to try to give back as close as possible the amounts of underlying assets liquidity providers provided to the pool.
To do so, Swaap has been inspired by algorithms the active market makers have been using for years in TradFi & CeFi. The platform leverages both oracles and a dynamic module in order to compute asset prices:
- Chainlink Price Feeds provide market data that is used to determine the ‘mid-price’ of assets on the platform
- A dynamic spread is calculated in order to help protect the pool during volatile conditions. The dynamic spread is based on a volatility prediction based on price data from Chainlink, a stochastic calculation, and the pool’s liquidity.
Swaap Is Launching on Polygon
Swaap is live on the Polygon network. This will guarantee transactions to be faster and cheaper than on Ethereum, with a much higher oracle frequency, while maintaining the highest security and compatibility standards.
Initially, there will be a unique pool composed of three assets: ETH, BTC, and USDC. The pool will be eligible for retroactive rewards. This means that LPs depositing their liquidity will receive additional native tokens, based on their contribution to the pool.
Swaap has been audited by two well-known companies: Chain Security and Runtime Verification. A necessary step in a DeFi ecosystem that too often suffers from the media coverage of numerous high-profile scandals.
The protocol is supported by DeFi & Web 3 experts such as Julien Bouteloup (CEO & Founder, Stake Capital), Pascal Gauthier (CEO Ledger), Meltem Demirors (CSO Coinshares), Richard Ma (CEO Quantstamp), Mounir Benchemled (CEO Paraswap) or Frédéric Montagnon (Chairman Arianee).
White Paper: https://www.swaap.finance/whitepaper.pdf
Disclosure: This is a sponsored press release. Please do your research before buying any cryptocurrency or investing in any project.