Professor Hyoung Joong Kim at Hoseo University has developed a new trading method that allows impermanent gain (IG) and addressed the major problem of impermanent loss (IL) in the decentralized finance industry. The new method has the potential to make liquidity providers happy by offering IG, which is achieved through origin-crossing, reordering, and batching. Here is an interview with Professor Kim.
Can you explain what IL is?
Impermanent loss (IL) is the phenomenon where liquidity providers always lose money when trading through a traditional automated market maker (AMM) on a decentralized exchange (DeX). Liquidity providers are hesitant to deposit their assets (for example, ETH and USDC pair) into an AMM with impermanent loss, but IL has been a persistent issue for AMMs, and eliminating it has been a significant challenge.
Why do liquidity providers provide liquidity even though IL occurs?
The fees paid by traders for exchanging coins through the AMM are given to liquidity providers as interest, and the DeX's governance token is given to liquidity providers as a reward. These benefits have attracted liquidity providers.
Was it impossible to eliminate IL?
Ever since the existence of IL was known, efforts to eliminate it have continued. Uniswap's constant product market maker (CPMM), which is considered the de facto standard, requires liquidity providers to deposit assets in a 50:50 symmetric balance. Balancer's asymmetric balance (for example, 80:20 rather than 50:50) and Curve's StableSwap successfully contributed to reducing IL but could not remove it. As a result, pessimism emerged that eliminating IL is equiva-lent to developing a perpetual motion machine.
Is it true that you removed IL?
Yes, I have removed IL. My approach is a combination of origin-crossing, reordering, and batching. Origin-crossing is the key factor that always allows impermanent gain. However, origin-crossing happens rarely, so it is necessary to reorder and batch transactions to achieve it. This three-piece set eliminates IL and guarantees IG.
I think reordering manipulates prices.
No. When calculating the nominal price, reordering and batching are applied. However, trades take place in their original order, so trader trade at normal prices. Price manipulation occurs only when it gives traders unfair gains or losses.
What was the industry feedback?
The response from the industry has been positive. People have asked me if IG is guaranteed even when liquidity is small or if only selling or buying comes in. IG is guaranteed in a healthy market with plenty of liquidity and a good balance between buying and selling. They have also asked if IG would be guaranteed to liquidity providers who entered the market early before the situation of the liquidity pool changed, such as changing the CPMM constant. I am the first to present a method that can guarantee IG under specific conditions. I expect that this method will be improved through the efforts of many people in the future.
Has this method been patented?
Yes, it has. Hackers Holdings is willing to deploy open-source codes based on my patents. I welcome anyone who wants to grow this market while respecting my patents.
Professor Hyoung Joong Kim(khj-@korea.ac.kr) is the president of the Korea Fintech Society. He was a professor of the School of Cybersecurity at Korea University and is now a Chair Professor of the Department of Digital Business at Hoseo University. He received his B.S. degree in electrical engineering and M.S. and Ph.D. degrees in control and instrumentation engineering from Seoul National University. Last year, he founded the Journal of Digital Assets to lead the new wave of upcoming digital finance. His research interests include information security, cryptocurrency, decentralized finance, and data hiding.
The first page of Professor Hyoung Joong Kim's paper
