- Michael Egorov shares a new DeFi paper on eliminating impermanent loss.
- The proposed strategy uses leverage and rate rebalancing instead of price rebalancing.
- Simulations show up to 20% APR with single-sided exposure and reduced risk.
Curve Finance founder Michael Egorov has introduced a new decentralized finance (DeFi) strategy designed to eliminate impermanent loss, one of the biggest and most persistent challenges for liquidity providers. The proposal was detailed in a new paper published by Yield Basis on the social media platform X, captioning it “Yield Basis is coming.”
The proposed model uses a novel combination of stable leverage and interest rate balancing, giving liquidity providers the benefits of earning automated market maker (AMM) fees while only being exposed to a single asset, neutralizing the risk of impermanent loss.
Strategy Targets One of DeFi’s Biggest Challenges
Impermanent loss occurs when liquidity providers earn less than they would by holding their tokens. It results from price divergence between the two assets in an AMM pool. Egorov’s solution neutralizes this risk by maintaining constant leverage between the deposited and borrowed assets.
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Instead of rebalancing based on price, the model adjusts through interest rates. Providers supply one token and borrow the other, preserving the exposure of a single asset while still earning trading fees. The model allows for predictable earnings without the downside of token price volatility.
How It Works: Leverage and Interest Rate Mechanics
The approach relies on AMMs configured to manage leverage automatically. A special “re-leverage AMM” adjusts positions as market conditions change. Liquidity providers are exposed only to one token, while the borrowed asset fluctuates. Interest rates shift to maintain market balance, replacing the need for price-based rebalancing.
Egorov presents a formula to estimate net APR, accounting for earned fees, borrowing costs, and rebalancing losses. The paper shows consistent positive returns by simulating various market scenarios, including volatile BTC/USD conditions.
Simulations Show Promising Returns
In backtests spanning six years, the strategy outperformed traditional AMM setups. Under Curve’s crypto swap configuration, the model achieved up to 20% APR. It performed best when token prices stayed within a modest range, allowing the fee income to cover any borrowing and rebalancing expenses.
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This model suggests a way to earn yield without active trading or multi-asset exposure passively. If implemented successfully, the model could change how liquidity is provided across decentralized finance protocols.
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