Temporary Loss vs. (Traditional) Impermanent Loss
In traditional spot AMM models (e.g., CFMM, such as Uniswap), LPs face impermanent loss. However, this term is highly misleading in many cases for the following reasons:
- 1.Whether the market price rises or falls relative to the price when LPs added liquidity, LPs will suffer from impermanent loss, a one-way loss, meaning there's no concept of "impermanent profit".
- 2.The "impermanent" loss that LPs suffer can easily turn into a "permanent" loss.
A more detailed explanation of point 2 is as follows:
The theoretical basis for defining the loss as "impermanent" is that, the impermanent loss would be reversed to zero if ever the market price returns to the price at which the LPs initially added liquidity. However, except for a few pegged pairs (e.g., stablecoin pairs), the prices of most tokens do not fluctuate around a reasonable "mid-price" (e.g., we cannot assume that the price of BTC or ETH relative to the dollar fluctuates around any specific value). It may take a long time for the price to return to its initial value, if it ever does. Thus, the LP's "impermanent" loss can easily become a "permanent" loss.
However, in the BRMM model, LPs face what is really an "impermanent loss", which we refer to as a "temporary loss":
- The BR value will primarily fluctuate around 0, influenced by the anchoring effect of the funding rate.
- Holding a certain position does not necessarily result in loss for LPs. (In fact, from the experience of some derivatives DEXs based on the "betting between LPs and users", in the long run, the probability of LPs gaining profits from their positions is greater.)
- The Risk Buffer Fund will bear all temporary loss first (correspondingly, the profits from LP positions will also be accumulated into the Risk Buffer Fund, which also has other continuous sources of income, detailed in the next section). This further reduces the probability of LPs suffering from temporary loss.