Zircon Finance, an automated market maker (AMM) and a decentralized exchange on Moonbeam has announced the launch of a mainnet to address investor challenges related to impermanent losses in decentralized finance (DeFi).
(Impermanent Loss means a decline in the value of the initial margin cryptocurrency when providing liquidity to APMs (Auto Market Maker). This happens because the ratio between the coin pairs you offer liquidity to change when the market is highly volatile.)
Impermanent Loss are related to investors losing assets that they had previously set aside to provide liquidity to the liquidity pool to make a profit through yields. The mainnet, dubbed Zircon Gamma, aims to combat such Impermanent Loss through liquidity on the Moonriver network, which tracks or divides risk between a cryptocurrency and a stablecoin.
For example, the ETH/USDC, Zircon pair allows Ether (ETH) to maintain a level of publicity while ensuring safety through the stablecoin USD Coin (USDC). In addition, the main network allows both parties to earn swap fees.
As Zircon explains, large liquidity groups like ETH double their profits compared to conventional groups but are still at risk of Impermanent Loss. However, AMM’s internal LPing Async mechanism reduces the risk by at least 90%.
The mechanism does this by incentivizing liquidity pools to recover lost ETH funded through earned fees. Speaking to Cointelegraph, Andrey Shevchenko, co-founder of Zircon, revealed that his inspiration to create such a system stemmed from traders’ need for a flexible and permissionless solution, stating:
“Too many people are harmed by groups that make great but misleading claims about eliminating or compensating for Impermanent Loss. In some cases, the mechanism they put in place doesn’t really work.”
Shevchenko acknowledged the obvious causes of failure in the case of the token dropping to $0 but argued that “Zircon reduced it enough that the Impermanent Loss didn’t matter. Moreover, we can weaponize it to create options.”
When compared to current players who are resistant to Impermanent Loss, Shevchenko emphasizes multiple safety mechanisms that help rebalance liquidity pools. However, he recommends users do research when choosing their trading pairs, adding that “It’s an incentive-based economic system that you can expect to work 99% of the time.”
In addition to protecting users from Impermanent Loss, Zircon’s differentiating factor includes providing direct liquidity to stablecoins and cheaper swap fees. Shevchenko concluded: “Overall, we will become a cheaper and more liquid option to swap anything outside of the pairs that are really popular on Uni V3.”
A whitepaper recently released by Trader Joe’s, an Avalanche-based DeFi protocol, also claims to have resolved the issue of Impermanent Loss.
/3 When swaps are performed, the funds available in a liquidity bin are exchanged at a constant price.
If a swap requires more liquidity than is available in the current bin, it will move to the next bin.
LPs can concentrate liquidity around a price range delimited by 2 bins.
— The DeFi Investor🦇🔊 (@TheDeFinvestor) August 23, 2022
A whitepaper outlining the use of the Liquidity Book (LB) introduces variable swap fees to “provide traders with zero trades or low slippage”.