What Is a Common Alternative AMM Formula Used to Reduce Impermanent Loss for Stablecoin Pairs?
The most common alternative is the StableSwap invariant, often represented by a combination of constant product and constant sum formulas. This formula is designed to maintain a nearly constant price ratio (close to 1:1) with very low slippage for assets that are expected to trade at a similar price, like stablecoins.
It allows for much deeper liquidity around the peg, significantly reducing impermanent loss as long as the peg holds. If the peg breaks, the impermanent loss can be much higher than a standard AMM.
Glossar
Reducing Impermanent Loss
Mitigation ⎊ Reducing impermanent loss (IL) within cryptocurrency liquidity provision, particularly on Automated Market Makers (AMMs), necessitates a strategic approach balancing capital efficiency and risk exposure.
AMM Formula
Mechanism ⎊ Automated Market Makers utilize a formula to price assets, fundamentally differing from traditional order book exchanges by relying on liquidity pools rather than centralized order matching.
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.