Curve Finance founder Dr. Michael Egorov is addressing the persistent issue of impermanent loss in decentralized finance (DeFi) through the platform’s Yield Basis protocol. Impermanent loss, a major deterrent for crypto holders considering liquidity provision on DeFi platforms, occurs when the value of deposited tokens diverges, potentially eroding earnings from fees.
Yield Basis aims to solve impermanent loss through creative leverage. Instead of passively rebalancing the pool, Yield Basis uses self-compounding leverage to mirror spot prices. When one asset's price increases, the system borrows against it and buys the underperforming asset, increasing exposure to the outperformer without reducing depth. This continuous loop ensures that liquidity provider (LP) positions closely track the underlying asset's movements, similar to holding it in cold storage, while still earning trading fees. The protocol tokenizes liquidity positions into yield-bearing assets (like ybBTC and ybETH), which can be staked for additional rewards.
This approach enhances capital efficiency because the pool uses leverage to maintain balance instead of holding excess coins. Sophisticated traders often avoid volatile pools unless incentives compensate for the risk. By mitigating this risk, Yield Basis can attract sidelined treasuries and market makers back to Curve, enhancing liquidity and reducing slippage across DeFi. This improved depth benefits leverage platforms, stablecoin swaps, and even on-chain options.
For users, the process is simplified: deposit tokens, earn fees, and retain upside. There is no need to track divergence, hedge on perpetuals, or worry about market fluctuations. Directional holders are paid to hold long positions, passive managers gain exposure without constant rebalancing, and DAOs can deploy idle assets without needing quantitative analysts.
The strategy, detailed in a paper published on X, involves stable leverage and interest rate balancing to mitigate risks from price divergence in automated market maker (AMM) pools. Liquidity providers can earn AMM fees while being exposed to only a single asset, neutralizing impermanent loss. This is achieved by maintaining constant leverage between deposited and borrowed assets, rather than relying on price rebalancing. Liquidity providers supply one token and borrow the other, limiting their exposure to a single asset and providing predictable earnings without the typical volatility.
AMMs are configured to automatically manage leverage. A "re-leverage AMM" adjusts positions based on market conditions, ensuring exposure to only one token while the borrowed asset fluctuates. Interest rates are adjusted to maintain market balance, replacing price-based rebalancing. Simulations over six years showed this strategy outperforms traditional AMM setups, achieving up to 20% APR under Curve's crypto swap configuration, especially when token prices remain within a modest range.
Potential risks include liquidation threats from leverage and smart contract vulnerabilities. Egorov has promised transparent code and conservative parameters before the mainnet launch. Audits and testing are underway to ensure worst-case scenarios do not deplete total value locked (TVL). If these checks are successful, Yield Basis could make impermanent loss a thing of the past, marking a significant milestone for DeFi.
The project has already raised $5 million at a $50 million valuation, indicating strong investor interest. The token (YB) has a vesting schedule that includes a six-month cliff followed by two years of linear release. Currently in a "test-in-production" phase, Yield Basis is undergoing audits and testing before its full-scale launch.
