yieldbasis (@yieldbasis): Solving impermanent loss is the next chapter of Ethereum Defi adoption

Solving impermanent loss is the next chapter of Ethereum Defi adoption In essay on Low-risk DeFi, @VitalikButerin made a striking analogy: low-risk DeFi can be for Ethereum what search was for Google. We have stablecoins. We have lending markets. We have liquid staking. But the core innovation that started DeFi was automated market making (AMM). The biggest ETH/Stablecoin liquidity pools have just $170M and $82M TVL. Meanwhile, single-sided strategies command tens of billions. This isn't a user experience problem. It’s a result of an AMM economic problem: Impermanent Loss for liquidity providers. We are still early A lot has been said regarding institutions entering and using web3. However, if we look at the two statements below, both are correct: Ethereum is the most institutionally adopted chain in web3. We are still early. Why are we still early? Vitalik recently shared a highlight that explains everything. Provide a caption (optional) The post focuses on prediction markets and smart contract safety, but what key idea can we extract from it? To achieve wider Ethereum adoption, two types of risks must be reduced for end users: technical and economic. Smart contract safety risks are well known, widely researched, and significant progress has been made to minimize them. Now we have protocols that are widely trusted by the community due to code safety verified with billions of dollars in assets supplied. Economic risks are a more complex category. For example, prediction markets have risks for market makers’ liquidity (and as we know, developed markets require MMs). The closer the outcome of the market, the greater the risk, since one of the outcome shares approaches zero in value. Prediction markets are still relatively new in terms of adoption scale. The most well-known and widely used onchain market design, AMMs, have their own well-known economic risk: the Impermanent Loss problem (regardless of how the design has evolved over the 9 years since Vitalik’s AMM idea). An interesting observation is that AMM design has in many ways evolved from prediction market design. Defi adoption follows the IL avoidance Since the Ethereum PoS transition, ETH has been a productive asset by design. Exploring Ethereum’s DeFi landscape, it is clear that users try to generate value in IL-free products. Capital has voted to (1) earn staking yield on Ethereum holdings and (2) earn additional yield on top of staking yield without Impermanent Loss: by depositing ETH to LSTs and lending it on lending markets, or by depositing ETH (LST) to restaking protocols to earn yield from providing cryptoeconomic security. or by minting USD stablecoins against Ethereum (LST) and generating yield from that (Ethena, USDS, etc). The biggest AMM pools for Ethereum have only $161m and $80m TVL respectively for USDT and USDC, and they lead Uniswap’s fees leaderboard (#1 and #4 by 24-hour fees). These pools are Uniswap v3 pools, which means that hedging IL (if it’s ever a real case), even with developed onchain and offchain tools, is possible only for a very limited number of LPs. This is a result of economic risk in action. AMMs work perfectly and the code is safe, the fundamental economic structure leading to losing your ETH upside to impermanent loss - pushes capital away. It is also worth noting that onchain spot liquidity for ETH is much larger since it is distributed across many DEXes. Change everything by solving IL Ethereum as an asset also has an additional source of organic yield generation: spot trading fees. It’s a real yield from activity aligned with Ethereum goals (ETH liquidity is essential for Defi operations). This option is less popular than LSTs and lending because the risk/reward profile is poor: few want to lose ETH upside due to Impermanent Loss. Hedging is very complicated and does not work effectively at scale (otherwise, we would already see protocols offering it widely to users, but that is not the case). Solving Impermanent Loss can change everything for Ethereum DeFi: Provide a new, scalable, and non-subsidized yield source for ETH (LST) holders with a much better risk/reward profile than existing AMMs. Increase onchain ETH liquidity by an order of magnitude. Make Ethereum’s DeFi infrastructure more mature and resilient since ETH liquidity is the backbone for market functioning (liquidations, DeFi strategies, and more). With Ethereum as the core ecosystem, ETH is the next step for YieldBasis’s IL-free pools Prior work YieldBasis is a protocol providing liquidity pools free from Impermanent Loss by design. It eliminates the traditional impermanent loss issue, originating from a significant changing ratio of assets in the pool due to price changes. It was deployed on Ethereum mainnet approximately 1.5 months ago, starting with wrapped Bitcoin pools. YieldBasis pools were initially tested with $1m, $10m, and $50m TVL caps per pool. The testing period also included extreme volatility events such as the October 10 flash crash. Stats for YieldBasis pools can be explored on Dune. Now YieldBasis has $150m TVL* in pools without Impermanent Loss. The protocol works as intended, providing deep wrapped Bitcoin liquidity and generating fees for LPs. * This is the current maximum TVL allowed in the protocol, which will soon be expanded to $500m. Even with this limit, YieldBasis already provides the most liquid pools for cbBTC and tBTC in the Ethereum ecosystem and beyond. For wBTC, the TVL gap with the Uniswap v3 pool is less than $7m: Shortly after deployment, YieldBasis pools became the only volatile pools in the top 5 by TVL on Curve**: **YieldBasis pools are built on top of Curve and use 2x leverage for user positions. The user-provided TVL is around $150m, while total pool TVL is approximately $300m. YieldBasis next step: IL-free pools for ETH After successfully launching and testing wrapped Bitcoin pools in various market conditions, including extreme volatility, YieldBasis plans to support ETH pools. Expected Impact on the Ethereum Ecosystem: Introduce a new yield source for WETH and LST holders originating from volatility and market volumes. This could add yield on top of LST while greatly improving the risk/reward ratio for LPs compared to existing AMMs. Increase onchain liquidity depth for ETH and LST against stablecoins. Strengthen the resilience of Ethereum’s DeFi infrastructure lending markets, CDP stablecoins, and liquidation systems by improving spot liquidity for ETH-based collateral assets. Closing thoughts: DeFi began with the invention of AMMs. DeFi adoption has followed IL avoidance. This is why we are still early. Now it is time to solve Impermanent Loss, not avoid it a clear pathway to a lower-risk DeFi vision with deeper liquidity, higher efficiency, and better yield opportunities with improved risk/reward profiles. This publication is for informational and educational purposes only. It does not constitute financial or investment advice. The concepts described herein are presented purely as technical and research-oriented ideas and are not related to any token issuance, financial product, or trading activity.