Balancing Act: Balancer Brings Automatic Rebasing to Defi
Weekly Analyst Thoughts
Ampleforth-USDC Smart Pool
Before Uniswap, decentralized exchanges were plagued with low liquidity and trade volumes. Decentralized exchanges had orderbooks, complicated cryptocurrency wallets and several functional problems for users. The advent of automated market making by Uniswap revolutionized decentralized exchanges. The AMM model consists of liquidity providers who provide 50% of one asset and 50% of another asset into a pool and earn a 0.3% fee anytime someone trades one asset for the other inside the pool. However, one big problem that comes with the AMM model is the impermanent loss for liquidity providers. An impermanent loss is what an LP incurs when they provide liquidity to a pool and the assets in the pool diverge from the price established when the liquidity was first provided. It is called impermanent loss because the 0.3% trading fee revenue is meant to offset the loss from providing liquidity, but in some cases where the asset price diverges too much from the other asset, the impermanent loss could become a permanent loss.
The Ampleforth-USDC Smart pool on Balancer aims to mitigate impermanent loss with a smart contract that automatically rebalances the Ampleforth-USDC pool to a 50-50 weighting based upon Ampleforth’s daily rebases. Ampleforth is an elastic cryptocurrency that has a target value of $1. As Ampleforth trades above $1, the token does an automatic rebase where it increases the AMPL supply to push the value down to $1, which signals the Balancer Smart pool to adjust the AMPL-USDC weightings to mitigate impermanent loss. In summary, if a liquidity provider is looking to mitigate impermanent loss risk and is looking for innovation in the Stablecoin pooling space, look no further than the AMPL-USDC smart pool on Balancer.
Jacob Stelter | Blockchain Analyst