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Arbitrum Blockchain Introduces Safeguards Against 'Impermanent Loss' for Traders

Sep 21, 2023 at 11:52 am

GammaSwap, a novel application, is heralded by its developers as the pioneer in enabling Arbitrum users to hedge against provided liquidity by engaging in short positions.

Today, the decentralized trading service, GammaSwap, made its inaugural debut on the Arbitrum network. Developers assert that this move holds the potential to be advantageous for liquidity providers within the widely-used blockchain, offering a safeguard against a phenomenon known as impermanent loss.

GammaSwap presents an avenue for users in the decentralized finance (DeFi) realm to borrow tokens from liquidity providers (LP) via automated market makers (AMMs) and subsequently "short" them. This strategy serves as a means to hedge against supplied collateral or formulate trading tactics with reduced risk. "Shorting" is a tactical approach aimed at capitalizing on a decline in asset prices.

Automated market makers operate as blockchain-driven trading mechanisms, pooling assets together and establishing a fixed trading ratio based on the equilibrium between supply and demand. Liquidity providers, individuals who contribute assets to the pool in exchange for rewards, shoulder the risk associated with potential impermanent loss (IL).

Impermanent loss transpires during pool rebalancing. As token prices within the pool deviate from their initial ratio, the value of the liquidity provider's position diminishes. The extent of loss is contingent on the level of volatility; greater disparities in token prices result in more substantial losses and heightened likelihood of negative returns. Nevertheless, this loss is described as "impermanent" because it dissipates if the ratio reverts to its initial state.

Given the inverse relationship between market volatility and liquidity provider profits, providers effectively engage in a form of "shorting" volatility. This implies they garner profits when volatility is low but incur losses when it is high. GammaSwap endeavors to address this dynamic.

GammaSwap introduces a pioneering approach, permitting traders to effectively adopt a "long" position on volatility by "shorting" LP tokens. This allows them to assume the opposing stance to a liquidity provider, resulting in an impermanent gain rather than a loss.

These functionalities hold the potential to incentivize more users to participate as liquidity providers, equipping them with a means to hedge against potential declines in token values. Consequently, this development is anticipated to augment liquidity across the Arbitrum network.

A representative from GammaSwap communicated to Bitsday that the team has plans to extend their deployment to additional blockchains, including BNB Chain and Ethereum. Additionally, they aim to provide support for Uniswap liquidity providers, who collectively lock up billions of dollars worth of tokens across a multitude of trading pairs.

Read more: Binance Introduces 'T+3' Daily BNB/USDT Option Contracts

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