Decentralized exchanges (DEXs) have become an integral part of cryptocurrencies, bringing liquidity to hundreds of tokens. Around $67 billion in capital has been provided by liquidity providers for DEXs in 2022, allowing users all over the world to own and trade hundreds of tokens. However, impermanent loss remains a key risk for liquidity providers on DEXs, reducing or eliminating returns made from trading fees. The need to deal with impermanent loss has become crucial for cryptocurrencies, as lower liquidity in DEXs could harm global adoption.
As part of the Genius Yield platform, the Genius DEX will become the first order-book DEX with concentrated liquidity built on Cardano that eliminates impermanent loss. The order-book model that the Genius DEX uses is similar to other major centralized exchanges. The most widely used DEXs built on blockchains such as Ethereum use the Automated Market Maker (AMM) model, which causes impermanent loss. By not using the AMM model, the Genius DEX eliminates impermanent loss while also giving traders the same dynamic functionality of order-book exchanges.
What is Impermanent Loss?
Impermanent loss happens for liquidity providers when the value of their deposited assets in an AMM DEX is lower than if they had just held the assets. The AMM DEX was invented as a solution to having a DEX on account-based blockchains like Ethereum. Due to Ethereum’s account based model that requires serialization of transactions to a global state, an order-book exchange where different transactions can happen in parallel to each other is cost prohibitive and improbable for an account based model.
To allow a functioning DEX on account models like Ethereum, the AMM DEX was introduced, which uses the constant product formula, x*y = k. The formula dictates the ratio that two assets must trade at for every transaction in a liquidity pool. As trades happen, the ratio of the assets could diverge from the market prices on centralized exchanges, causing impermanent loss for all liquidity providers with capital in a liquidity pool.
The Solution — The Genius DEX Eliminates Impermanent Loss
The Genius DEX eliminates impermanent loss because it does not utilize the AMM model and its constant product formula. Therefore, the Genius DEX does not have impermanent loss. Instead, the Genius DEX uses the order-book model, which allows liquidity providers to create fragmented liquidity positions. Liquidity providers can also use concentrated liquidity on the Genius DEX, which allows them to designate what the price their fragmented liquidity positions can trade at for an asset pair. There is no fixed liquidity curve like the AMM model that dictates prices for every liquidity provider. While the Genius DEX eliminates the risk of impermanent loss, there are still risks to using any DEX.
Cardano’s EUTxO Model Benefits
The Genius DEX has an innovative architecture that takes full advantage of the properties inherent in Cardano’s EUTxO model. The EUTxO model allows for parallel transaction processing, scalability, and determinism. The Genius DEX provides an efficient and cost-effective way for users to trade and for liquidity providers to optimize their return on capital.
Why Impermanent Loss is Important
Many tokens are based on decentralized applications (dApps) that perform important functions such as lending & borrowing or decentralized storage. Many dApps would lose liquidity and functionality without DEXs. Impermanent loss could lead to liquidity providers removing their capital from DEXs, which could slow the growth of cryptocurrencies around the world.
More questions on Impermanent Loss?
Impermanent loss is a complex topic, that’s why Genius Yield created an eBook that goes into more detail. To get a deep dive on impermanent loss, visit the website and download this free eBook: The 2022 Ultimate Guide to Impermanent Loss, and how to avoid it.
What comes next?
Genius Yield is committed to using its technology to democratize access to decentralized finance (DeFi). The Genius DEX is expected to be released in 3Q 2022 as part of that effort.
About Genius Yield
While DeFi provides many investment opportunities, managing capital is both complex and time-consuming. Genius Yield is your all-in-one solution to benefit from advanced algorithmic trading strategies and yield optimization opportunities. Genius Yield’s Smart Liquidity Management protocol will be intuitive, hassle-free, and secure. Genius Yield minimizes risk and maximizes profits.
“The 2022 Ultimate Guide to Impermanent Loss, and how to avoid it” eBook is available under this link.
Brand: Genius Yield
Contact: Bartosz Antoniak, Head of Marketing
E-mail: [email protected]
This post is commissioned by Genius Yield and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.
© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.