I see many proposals to reward this or that pair using UNI. I still haven’t seen anyone propose something like this so here it goes:
The proposal is to direct a small % of the switch fees to fund a project that protects LP’s from Impermanent Loss, or at least mitigate it (for example, there is a solution using oracles to correct the prize instead of allowing the arbitrage opportunities) . If this works, it would be much more efficient than directly rewarding every LP for each pool for taking such risks.
And of course, if LP’s decide to use the uniswap exchange without this option, they would still be able to.
I’d love to hear your thoughts on this.
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Can you check my proposal? I already have pointed out this, there is no need of adding an oracle solution, we can still work with our GM formula, the arbitrage occurs because there are more liquidity at one side than another (For example we have 1 bitcoin at one side and 500 dollars at the another) creating the perfect opportunity for arbitrage traders to take profit from it. We can fix this by adding balance to the “risk” side (For example adding balance to the dollar side) that way we can always have stable price and we can avoid liquidity drainage
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Im not sure i understand your proposal. Many people have pointed this, impermanent loss corrodes LP’s profit thus corroding the liquidity available.
I don’t quite understand how you are planning to add balance to the risk side. Who is going to pay for that difference?.
The arbitrage occurs because there is a difference in the prices of the asset. The consequence of the arbitrage is the difference in the liquidity. Please correct me if im wrong
Suppose that I am a liquidity provider and I want to provide liquidity to the BTC-USD pair, suppose that BTC has a price of 10k USD, in order to provide liquidity to uniswap we must wrap tokens whose value represents the same liquidity, for example I would have to wrap 1 BTC with 10k USD or 0.5BTC with 500 USD, or as best suits our needs.
Now suppose that after providing liquidity and after many trades the liquidity balance is disproportionate.
Suppose that at the beginning of our journey there were 10 bitcoin and 100,000 USD (100,000 / 10 = 10k per bitcoin) within our liquidity pool, and after several trades (and / or changes in price) the balance was disproportionate leaving 12 BTC and 90,000 USD (90,000 / 12 = 7.5k per bitcoin)
This will cause an impermanent loss on all liquidity providers since the price shown would not be the real price of the asset, this is where the arbitrage traders take profit, since they will begin to trade in that pool until the price shown in the It reflects the real market price, eating into the liquidity of suppliers.
The way to patch this up is by offering UNI holders the opportunity to be able to “offer” their assets directly to be put below the liquidity offered by liquidity providers. For example, the way to remedy the aforementioned example would be to add 30,000 USD of liquidity to the BTC-USD pair.
Since the liquidity provided by UNI holders to the riskier part will be under the liquidity provided by LP, our assets should remain risk free. For example if I am a UNI holder and I have 500 links wich I have as an investment and I want to hold them. I can join the UNIfy ecosystem and help balancing the liquidity thus reducing arbitrage, thus increasing more liquidity provided into the exchange since most people don’t offer liquidity because of this issue
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But how would the protocol know the appropriate amount any pair needs to balance without an oracle solution? You’re assuming you just know the correct price at any moment.
You lost me in the last paragraph. If uni holders offer their assets to fill any pool gaps, how is that risk free? imagine in your example every LP wished to withdraw their tokens from the pool, every LP would get their 1 BTC + 10.000 USD + fees. Where is the 30,000 USD that the UNI holders offered to balance the pool? How do they get their money back + reward?
Risk free for UNI holders, LP will still subjected to impermanent loss wich is not the same as arbitrage trading, we can eliminate arbitrage trading but not impermanent loss.
The protocol knows the exact amount of each token inside the pairs for example it know the exact amount of USD in the ETH-USD pair, then we can take the price from another exchange (like what we do right now) or from a oracle solution whatever feed our need better
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I think its an interesting proposal, i would like to know more about it. However i do think its possible to attack the problem of impermanent loss.
Also, there may be many ways in which we can implement different mechanisms/options/protocols to reduce the risks and capital loss that affect LP’s.
What im trying to suggest is that we should fund a program, offer a bounty or any other method decided by the community, to attack this problem in the best possible way(s).
In my opinion, this could ignite the discussion around the subject and give the community a chance to evaluate different options, without leaving any idea behind.
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Yes exactly that’s what all this is about, creating together, here you can find my full proposal Proposal: Create an only UNI-holders ecosystem/Eliminate arbitrage traders
I also hope that this ignite people interest and ideas because there are actually few proposal that makes sense, honestly I don’t see why people are more interested in, for example, the pronunciation of UNI than building a better environment for that UNI, but that’s how things are, sadly
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