John Lo of Recharge Capital argues that reducing transient losses would democratize DeFi market-making.
A press release dated March 7 that was shared with Cointelegraph states that the infrastructure of Lava will enable automated market makers (AMMs) to optimize liquidity across multiple blockchain networks and mitigate transitory loss in their liquidity positions.
John Lo, managing partner of digital assets at Recharge Capital, said that all liquidity providers in decentralized exchanges face the risk of impermanent loss. Speaking to Cointelegraph, he stated:
“This is a huge problem that affects efficient markets on-chain and has led to a return to old design; it’s also a big problem for consumers.”
Yield farming is an investment strategy whereby one lends tokens to earn rewards, which is different from staking; impermanent loss occurs when the price of a token changes after a user deposits it in a liquidity pool-based automated market maker. This is one of the main drawbacks of decentralized finance (DeFi). It’s a major red flag for institutional investors who are wary about DeFi.
Lo claims that DeFi technologies will enter a new era if they are able to prevent transient loss. “The door is now open for DeFi to democratize market making instead of going back to the old ways of doing things in finance, and it also gives decentralized platforms a chance to compete with centralized venues for market making and capital efficiency. Various advantages of alternative market creators over conventional architecture are already present, and Lava amplifies, if not unifies, these advantages,” Lo explained.
Funded by Recharge Capital, the new platform from Lava intends to increase the market depth of cryptocurrencies, which is defined as the market liquidity of a security or asset as measured by the quantity of active buy and sell orders, and empower liquidity providers in the process.
Using collateralized lending of liquidity positions and arbitrage across market maker rates, Lava claims to be the first platform to tackle temporary losses in DeFi.
In addition to streamlining yield optimization for passive liquidity providers, the platform will let customers arbitrage between DeFi and centralized finance protocols to discover an efficient market rate.
One such multichain network is Lava, which is accessible on both the Arbitrum and Base blockchains at the moment. Future extensions to additional blockchains are in the works for the protocol.
Also Read: NYCB stocks jump as banks prepare for Fed bailouts’
