Introduction to Yield Basis
Yield Basis, an innovative setup from Curve Finance—a notable player in the decentralized finance (DeFi) scene—aims to alleviate the long-standing issue of impermanent loss faced by liquidity providers (LPs) dealing with tokenized Bitcoin and Ether. This was discussed by Curve’s founder, Dr. Michael Egorov, who explained how the protocol not only addresses this common pitfall in liquidity pools but also introduces a systematic way to manage token inflation and emissions.
Understanding Impermanent Loss
Impermanent loss occurs when the market value of assets in a liquidity pool fluctuates negatively compared to merely holding the tokens. According to Dr. Egorov, this phenomenon is particularly noticeable when the deposited funds align with the square root of Bitcoin’s market price.
“The dependency on the square root causes impermanent losses. Our approach aims to eliminate that dependency,”
Egorov stated. The mathematical solution, he proposed, involves squaring the dependencies to remove those losses.
Mechanism of Yield Basis
Yield Basis utilizes a method of compounded leverage, ensuring that positions are overcollateralized at a consistent rate of 200%. This is achieved by integrating borrowed crvUSD, a decentralized stablecoin pegged to the US dollar, which allows the value of the position to remain precisely twice that of the collateral put in. This mechanism directly tackles the square root issue tied to impermanent loss, which has been a significant deterrent for potential liquidity providers looking to engage in the DeFi ecosystem.
Yield Options and Market Adaptability
Furthermore, the Yield Basis protocol offers bifurcated yield options, allowing users to choose yields in either tokenized Bitcoin or the Yield Basis token itself. This setup contributes to the setting of inflation rates and aids in controlling total token emissions effectively. During bullish market trends, investors might prefer to hold and stake the Yield Basis token to benefit from potential price increases, thus aiding real yield generation on the platform. Conversely, in extended bearish environments, the preference might shift towards receiving yields in Bitcoin, which can help offset inflation from YB tokens during bullish phases, thus helping maintain an ideal value buildup of the YB token itself.
Conclusion
Dr. Egorov emphasizes that the adaptability of Yield Basis’s structure caters to varying market conditions, fostering an environment that encourages participation from LPs across different cycles of the market.
