Hmmm,
I was trying to think of a simple analogy that makes it easy for users to understand the concept, but I couldn’t think of anything. If we were to go more in depth on the system:
“Add” liquidity providers wouldn’t lose money from impermanent losses as they get compensated with a token at an amount that is equivalent to the losses. They can trade away this token and buy back the same amount of crypto that they lost. This also means providing for lower liquidity pools is less risky because your value isn’t lost.
People buy these tokens because it allows them to earn an APY from the provide tab without having the potential to lose their crypto assets. The Provide Tab also allows one sided provisions, so it’s beneficial for people who don’t want to match their capital with PRV in the “Add” section.
Companies like Nexo.io and Crypto.com all have their own coin that if you own, increases your APY. So it’s a similar concept, except there would be a few differences.
I’m not quite sure how the functionality of the new token should work as there could be many better alternatives then the one i’m putting forward.
With This System:
When users withdraw from “Add”, new tokens get minted based on impermanent losses and given to the provider. That means when people withdraw from the Provide Tab, which is a layer that works on top of the current “Add” functionality. New tokens would be generated.
We have a few options at this point:
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We could automatically exchange these new tokens to buy back the losses;
– But this would just inflate the amount of tokens created and eventually the system would fall apart when to many tokens are generated.
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Instead of generating new tokens, we take the tokens from the persons account and use those to compensate for the losses;
– This scenario forces the losses on to the user who uses the Provide Tab. (Problem)This might force users to use the “Add” feature instead, which means the demand for the token would go down, messing up the system, but i’m not sure.
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We could have a membership like program with the Provide Tab. To enter, you have to put these tokens into the Provide Tab. The tokens slowly get removed at a specific rate (Reverse Interest), and all your other holdings gain at at their rates.
– It is a very weird idea, but the tokens getting drained by everyone who is using the Provide Tab can pay for the Impermanent losses. The earnings should be more then the losses, but idk if this would actually be the case.
I think option 2 is the best I have, but we need to create more of a demand for the token if we want it to succeed. I’d say adding it as a requirement for staking nodes would increase the demand really hard, but their might be other options.
Your average end-user doesn’t necessarily understand impermanent losses so your right that it might be difficult explaining why you have to add this token to the Provide Tab, and lose some of it when you withdraw. But if they earn enough money from putting this token into the provide tab through price increases, or some sort of staking system, then you could make it so they aren’t losing any money on the token and withdraws.
It would be much easier to explain buying this token to put money in. The money is then being used to generate more money to pay for the losses associated with withdrawing.
If putting the token into the Provide Tab returns a rate in the token itself, then it might work out. But I don’t know the logistics behind a mechanism like that. As long as users have to put some percentage of their value into the Provide Tab as this token, then I guess it could work (at least for a while).
Idk this was just some sort of crazy midnight idea I had a thought about, didn’t really work out all the details.
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