Mitigating Impermanent Loss

Weighted pools offer a solution by allowing liquidity providers to customize the asset ratios, which can reduce impermanent loss. Let's delve into how weighted pools achieve this.

Traditional Unisawp-style pools

Impermanent loss may impact returns for liquidity providers in automated market maker pools, especially in traditional 50:50 pools like those found in Uniswap. In a standard 50:50 AMM pool, the liquidity provider deposits an equal value of two assets.

When the price of one asset rises or falls, the pool rebalances, and the liquidity provider may suffer impermanent loss. This loss occurs when the value of the liquidity provider's shares is lower than if they had simply held the underlying assets.

How does Bison reduce impermanent loss?

Weighted pools, like those used by Bison, allow liquidity providers to customize the asset ratio beyond the 50:50 constraint. By adjusting the weights, providers can tilt the pool's composition toward assets with lower volatility or higher potential returns.

This customization can mitigate impermanent loss in several ways:

Tilting Towards Stablecoins:

Liquidity providers can allocate a higher weight to stablecoins. This reduces the impact of price fluctuations on the pool's value.

Diversification:

Weighted pools can include multiple assets with different risk profiles. By diversifying, providers spread risk and reduce exposure to a single asset's price movements.

Optimizing for Expected Returns:

Providers can adjust weights based on their market outlook. For instance, they might allocate more weight to assets they expect to appreciate, thereby maximizing potential returns.