How Does a “Hybrid” AMM Curve Balance Capital Efficiency and Impermanent Loss?
A hybrid AMM curve, such as the one used by Curve, balances these factors by creating a price curve that is extremely flat near the target price (like a Constant Sum) and transitions to a Constant Product curve as the price diverges. The flat section maximizes capital efficiency and minimizes slippage/IL when assets are pegged.
The curved section ensures the pool can handle large price divergences without being completely drained, thereby limiting the maximum impermanent loss risk.
Glossar
AMM Curve
Algorithm ⎊ The core mechanism of an Automated Market Maker is defined by its curve algorithm, which dictates the price of assets based on the ratio of reserves in the liquidity pool.
Hybrid Amm
Architecture ⎊ A Hybrid Automated Market Maker (AMM) represents an advanced architectural design that combines the mathematical properties of different invariant functions, typically merging the constant product model with the constant sum model.
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.
Impermanent Loss
LiquidityRisk ⎊ Impermanent Loss quantifies the temporary divergence in value between holding assets in a decentralized liquidity pool versus simply holding those same assets in a non-interest-bearing wallet, resulting from price movements between the deposited pair.