Avalanche-based decentralized finance (DeFi) protocol Trader Joe’s claims to have discovered a way to minimize one of DeFi’s most serious flaws: permanent loss.
Developers outlined the use of the Liquidity Book (LB) with an additional variable fee swap feature called Tuesday in a newly released white paper on “Provide traders with zero or low-slip trades” Quant developers and researchers Adam Sturges, TraderWaWa, Hanzo, and software engineer who wrote the JOE v2 Liquidity Book Louis myself.
Trader Joe’s said the new strategy will reduce permanent losses “during market turbulence suffered by numerous liquidity providers (LPs) on other DEXs.”
Permanent loss occurs when the token price changes after it are invested in an automated market maker based on a liquidity pool as part of yield farming, a type of investment where tokens are lent to raise incentives.
According to Markus Thielen, a chief investment officer of digital asset management firm IDEG, this is one of the reasons institutional investors are wary of the DeFi space. Thielen said:
“I must admit that Trader Joe’s v2 whitepaper offers new insight and that liquidity providers are generating 30bps to facilitate trades, which is an attractive return for this industry when future growth is uncertain. We’d like to see how much liquidity v2 is pulling now and how Trader Joe’s TVL will evolve.”
According to the newspaper, Trader Joe’s Book of Liquidity (LB) is a type of liquidity pool (LP) that organizes the liquidity of an asset pair into price boxes that are traded at a fixed price.
LB provides more efficient handling of liquidity in response to sudden price fluctuations by proposing a new variable swap fee to protect traders from temporary losses by paying LPs in case of significant market volatility.
Trader Joe’s LB also offers zero-to-low shift trades, allowing traders to get better buy rates.
If done right, this could be a huge breakthrough. DeFi. According to a recent study, more than half of Exchangeable v3 LPs lose money during market turmoil as temporary loss exceeds swap fees.
THORChain is another DeFi system that provides LP deposits with permanent loss protection afterward. The first 100 days (with partial protection before this point).
The Trader Joe protocol itself is a “one-stop decentralized trading platform” built on the Avalanche smart contract platform. Together with $191 million in total value locked in (TVL) protocol, it is currently the largest decentralized exchange (DEX) on Avalanche.