Trader Joe, the largest decentralized trading platform on the Avalanche network, announced to introduce a brand new automated market marker (AMM) called “Liquidity Book,” to solve “Impermanent Loss”, which is one of the biggest weakness of the DeFi ecosystem.
Impermanent loss occurs when the total worth of all cryptocurrency holdings deposited by a liquidity provider into a pool starts to differ
from the total worth when first deposited. It happens while providing liquidity on DEX
es when the price of token changes
after one deposits it in a liquidity pool-based AMM as part of yield farming. Despite sharing similarity with ‘staking’
, yield farming supplies liquidity to a DeFi protocol in exchange for yield. In this type of investment, a user lends tokens to earn rewards.
What is Liquidity Book?
According to a whitepaper
, titled, “JOE v2 Liquidity Book”
, Liquidity Book aims to solve the biggest problems encountered by other popular DEXes. Going further, it will improve capital efficiency through concentrated liquidity
, and a variable fee that adjusts in response to market volatility to offset risks for liquidity providers. Introduced by the Uniswap V3, ‘Concentrated Liquidity’,
significantly reduces slippage and improves capital efficiency.
The Trader Joe team explained that Liquidity Book (LB) is a type of liquidity pool (LP) that arranges liquidity of an asset pair into price bins, which are exchanged at a constant price. The liquidity book will initiate a new variable swap fee, which will protect traders from impermanent loss by compensating LPs in the event of extreme market volatility. In this way the liquidity can be more efficiently managed in response to sudden price movements. In a statement, Trader Joe said,
“Concentrated liquidity allows liquidity providers to capture more fees with significantly less liquidity. Instead of having one pool with unbound price ranges, Liquidity Book has multiple separate bins with different prices that can be used as building blocks for a liquidity position.”
What are the Other Features?
The Liquidity Book design means that Joe v2 will not be reliant on external oracles like Chainlink for its prices. The Trader Joe team asserted that fair market value will be maintained by arbitrageurs who will step in to take advantage of price discrepancies between assets traded on Joe v2 and other exchanges.
Joe v2 will also introduce an internal “volatility accumulator” mechanism designed to measure market volatility and inform the platform’s variable fee without using external data feeds. Trader Joe is also aiming to introduce limit order functionality for Joe v2 in the near future.