⌛'Just-In-Time' Liquidity Defense

Understanding 'Just-in-Time' Liquidity and Its Detrimental Effects

'Just-in-Time' Liquidity, often abbreviated as JIT liquidity, refers to the practice of strategically executing a swap by injecting a substantial amount of liquidity into the narrowest possible price tick range within the duration of a single block. The aim is to obtain a more favorable price for the trade, benefiting the trader, while simultaneously capitalizing on the trading fees generated by other liquidity providers.

This practice, however, can be aptly described as parasitic due to its reliance on consistent liquidity providers. Without these steadfast long-term providers, the initial swap would not have been possible, rendering the entire JIT strategy unworkable. Steady liquidity providers play a crucial role in establishing and maintaining market conditions, helping to facilitate price convergence while assuming capital risk in the process.

The crux of the issue lies in the JIT strategy's exploitation of the groundwork laid by these long-term providers. Essentially, it takes advantage of the efforts made by these providers, intervening at the last moment to reap the benefits that have been made possible by the initial commitment and risk-taking of these providers.

In essence, while JIT liquidity may appear advantageous for individual traders seeking better prices, it raises ethical and fairness concerns within the ecosystem. It relies on the presence and sustained participation of consistent liquidity providers, potentially discouraging their engagement over time. The result is an imbalance in the distribution of rewards and risks, with JIT strategies disproportionately benefiting from the contributions of these steadfast market participants. This phenomenon underscores the importance of considering the broader implications and ethical considerations in DeFi and trading practices.

How Does this Affect Yields for LPs?

PerfectSwap has a distinct approach when it comes to fee distribution compared to potential JIT (Just-in-Time) liquidity providers. In the PerfectSwap ecosystem, all the fees that would have otherwise been designated for JITs are directly funneled to the liquidity providers. This transparent and equitable allocation ensures that liquidity providers receive their rightful share of trading fees.

It's important to note that the commonly observed Annual Percentage Rate (APR) on yield information pages can be misleading when applied to Uniswap V3. This misrepresentation occurs because such APR calculations often fail to account for the reduction in fees earned by JIT liquidity providers. In contrast, PerfectSwap acknowledges the significance of accurately reflecting fee distributions, maintaining fairness, and providing liquidity providers with the rewards they deserve. This approach underscores PerfectSwap's commitment to a balanced and transparent DeFi ecosystem.