Does the Capital Efficiency of a Stablecoin Pool Increase or Decrease the Risk of Impermanent Loss?
Increased capital efficiency in stablecoin pools (like those using stableswap curves) means that a smaller amount of liquidity can handle a larger trading volume with low slippage. This efficiency is achieved by concentrating liquidity near the peg.
However, this also means that if a de-peg does occur, the concentrated liquidity will be drained much faster by arbitrageurs, potentially increasing the speed and severity of the resulting impermanent loss.
Glossar
Stablecoin Pools
Pool ⎊ Stablecoin Pools represent a concentrated liquidity provision mechanism within decentralized finance (DeFi), specifically designed to facilitate trading activities involving stablecoins.
Concentrated Liquidity
Allocation ⎊ ⎊ Concentrated liquidity represents a departure from traditional automated market maker models by enabling liquidity providers to specify precise price ranges where their capital will be deployed, fundamentally altering capital efficiency.
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to capital at risk, a metric increasingly vital given regulatory constraints and market volatility.