Automated market makers (AMM) in decentralized finance (DeFi) have been growing rapidly in recent years, offering users the ability to trade assets instantaneously without relying on traditional financial institutions. However, one major issue that has been hindering the growth of AMM is impermanent loss (IL) for liquidity providers. These losses occur when liquidity provides deposit assets in AMMs and the value of those assets changes during the time they are held. Chair Professor Hyoung Joong Kim at Hoseo University has developed a new trading method that allows impermanent gain (IG) and addressed the major problem of 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 Chair Professor Kim.
Chung: Can you explain what IL is?
Kim: IL is the phenomenon where liquidity providers always lose money when trading through a traditional AMM on a decentralized exchange (DeX). Liquidity providers are hesitant to deposit their assets (for example, ETH and USDC pair) into an AMM due to impermanent loss, but IL has been a persistent issue for AMMs, and eliminating it has been a significant challenge.
Chung: Why do liquidity providers provide liquidity even though IL occurs?
Kim: The fees collected from traders for exchanging assets through the AMM are given to liquidity providers as interest, and the DeX's governance token is distributed to them as a reward. These benefits have attracted liquidity providers to AMMs.
Chung: Was it impossible to eliminate IL?
Kim: 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 equivalent to developing a perpetual motion machine.
Chung: Is it true that you removed IL?
Kim: 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 IG. However, origin-crossing happens rarely, so it is necessary to reorder and batch transactions to achieve it artificially. This three-piece set eliminates IL and guarantees IG if we wish to.
Chung: I think reordering manipulates prices.
Kim: No. Price manipulation is so defined when sellers and/or buyers suffer from losses due to unfair trade. However, trades take place in their original order, so they trade at actual price. The nominal price is calculated aftera combo of origin-crossing, reordering and batching are applied. The nominal price is announced for the liquidity providers. By utilizing the nominal price instead of the actual trading price, I removed IL.
Chung: What was the industry feedback?
Kim: 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. A market flooded with such unilateral demands is unhealthy and a road to ruin. IG is guaranteed in a healthy market with plenty of liquidity and a good balance between buying and selling demands. 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.
Chung: Has this method been patented?
Kim: 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 HyoungJoong Kim (khj-@korea.ac.kr or khj-@hoseo.edu) 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.
Professor HyoungJoong Kim's IG paper is available at https://blog.naver.com/opima/223067685655.
