🛑Impermanent Loss Defense

What's Stopping Everybody from LPing?

One of the most significant and legitimate concerns that deter individuals from participating in liquidity provision to earn yields is the issue of impermanent loss, a challenge faced by most retail liquidity providers. This problem can be attributed to two primary factors:

1. JIT Liquidity

2. Toxic Flow

JIT Liquidity, or Just-in-Time Liquidity, represents a situation where liquidity providers may not be reaping their fair share of rewards, creating opportunities for more advanced participants, including MEVs (Miner Extractable Value), venture capitalists (VCs), and hedge funds.

Toxic Flow is another circumstance where liquidity providers may not be receiving their due earnings. This condition allows advanced actors, such as MEV bots, to capitalize on the inefficiencies within the liquidity provision process.

'JIT Wars'

We're challenging the conventional JIT Liquidity paradigm. Instead of being exploited by JIT liquidity bots, we transform our AMM into a JIT fee collector. Our proprietary algorithm detects incoming volatility, at times even as it unfolds, and adjusts pool fees in real-time, ensuring that arbitrage trades on our platform can still occur while leaving only a small margin for MEV actors. This essentially means that liquidity providers claim the lion's share of profits, providing arbitrageurs with a small bounty for maintaining pool balance.

PerfectSwap's mission is to simplify and make liquidity provision a profitable endeavor for all participants. To achieve this goal, we have integrated dynamic fee structures into the PerfectSwap V3 Engine, building upon the successful implementation that exists in Solidly V2.

The fundamental principle behind our approach is straightforward: safeguarding our liquidity pools from the negative impact of toxic flows during periods of market volatility. For instance, during a substantial price drop in an asset like WETH/USDC, arbitrageurs swiftly react to rebalance prices across various market venues. While this arbitrage activity is beneficial, traditional liquidity providers in AMMs are often exposed and unable to adapt to these rapid market changes.

In more established marketplaces, market makers typically reduce their liquidity exposure to manage risk. However, in the context of AMMs, liquidity providers have no such flexibility, maintaining constant risk exposure and inadvertently allowing MEV bots to reap significant profits that should rightfully belong to them.

So, how do we address this issue? Our solution is JIT fees.

In essence, this approach can be summarized as follows:

• Higher fees during high volatility periods, mitigating the risk of toxic flow.

• Lower fees during periods of low volatility, minimizing the risk of toxic flow.

This innovative strategy aims to create a fairer and more balanced environment for liquidity providers, making liquidity provision on PerfectSwap not only profitable but also resilient in the face of market volatility.