Can a “Just-in-Time” (JIT) Liquidity Provision Strategy Mitigate Arbitrage-Driven Impermanent Loss?
JIT liquidity provision is a strategy where a large liquidity provider deposits and immediately withdraws liquidity within the same block, specifically targeting a large incoming trade. They front-run the trade, capture the fees, and withdraw before the resulting arbitrage trade occurs, thus avoiding the impermanent loss caused by the price rebalancing.
While highly profitable for the JIT provider, this strategy does not mitigate the overall impermanent loss for long-term LPs; instead, it captures the fee income that would have otherwise gone to them.
Glossar
Jit Liquidity
Momentum ⎊ The concept of Jit Liquidity, particularly within cryptocurrency derivatives and options markets, reflects the immediate availability of funds to satisfy margin requirements or execute trades, crucially differentiating it from traditional liquidity assessments.
Liquidity Provision
Capital ⎊ Supplying assets to decentralized pools forms the essential base layer for automated trading and derivatives pricing across the digital asset landscape.
JIT Liquidity Provision
Provision ⎊ Just-in-Time (JIT) liquidity provision, within the context of cryptocurrency derivatives and options trading, represents a dynamic allocation of capital to market making activities precisely when and where it is needed, rather than maintaining a static inventory.
Liquidity Provision Strategy
Capital Deployment ⎊ Liquidity Provision Strategy involves the systematic approach an investor takes to allocate capital into specific DeFi pools to generate yield, balancing the desire for high fee earnings against the tolerance for impermanent loss.