Curve Finance Founder Introduces Strategy to Eliminate 20% APR Impermanent Loss

Curve Finance founder Michael Egorov has introduced a new decentralized finance (DeFi) strategy designed to eliminate impermanent loss, a significant challenge for liquidity providers. The strategy, detailed in a paper published on the social media platform X, leverages stable leverage and interest rate balancing to mitigate the risks associated with price divergence in automated market maker (AMM) pools.

Egorov's proposed model allows liquidity providers to earn AMM fees while being exposed to only a single asset, thereby neutralizing the risk of impermanent loss. This is achieved by maintaining constant leverage between the deposited and borrowed assets, rather than relying on price rebalancing. The strategy involves liquidity providers supplying one token and borrowing the other, ensuring that their exposure remains limited to a single asset. This approach not only simplifies the process but also provides predictable earnings without the volatility typically associated with token price fluctuations.

The mechanics of this strategy revolve around AMMs configured to manage leverage automatically. A special "re-leverage AMM" adjusts positions in response to changing market conditions, ensuring that liquidity providers are only exposed to one token while the borrowed asset fluctuates. Interest rates are adjusted to maintain market balance, effectively replacing the need for price-based rebalancing. Egorov's formula for estimating net APR takes into account earned fees, borrowing costs, and rebalancing losses, demonstrating consistent positive returns across various market scenarios, including volatile BTC/USD conditions.

Simulations conducted over a six-year period show that this strategy outperforms traditional AMM setups. Under Curve’s crypto swap configuration, the model achieved up to 20% APR, performing best when token prices remained within a modest range. This allowed fee income to cover any borrowing and rebalancing expenses, highlighting the potential for passive yield generation without the need for active trading or multi-asset exposure.

Ask Aime: Curve Finance introduces new DeFi strategy to eliminate impermanent loss and enhance liquidity provider returns.

If successfully implemented, this model could revolutionize how liquidity is provided across decentralized finance protocols. By addressing one of the most persistent challenges in DeFi, Egorov's strategy offers a promising solution for liquidity providers seeking to maximize their returns while minimizing risk. The introduction of this new approach underscores the ongoing innovation within the DeFi space, as developers continue to refine and enhance the tools available to participants.