Minimizing Impermanent Loss in Asset-Pair Balancer Pools

Neil Pattanaik

doi:10.20944/preprints202310.0959.v1

Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Version 1 : Received: 16 October 2023 / Approved: 16 October 2023 / Online: 16 October 2023 (10:03:46 CEST)

Liquidity providers for asset-pair pools with constant value distri- bution, such as Balancer pools, experience some impermanent loss whenever there is price divergence in the tokens’ fiat values. In this paper, we model this impermanent loss for geometric mean invariant pools by deriving a function of two parameters. We analyze our function graphically, showing that unevenly distributed pools with large weighting disparities best mitigate the risk of impermanent loss. We conclude by providing a general protocol for liquidity providers to choose a suitable pool based on their risk tolerance and profit goals.

Impermanent Loss; Liquidity Pools; Geometric Mean Market Makers; Optimization; DeFi

Computer Science and Mathematics, Other

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Minimizing Impermanent Loss in Asset-Pair Balancer Pools

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