In the fast-paced world of decentralized finance (DeFi), automated market makers (AMMs) have transformed the trading landscape by allowing users to exchange tokens without middlemen. Despite this breakthrough, one persistent issue has been impermanent loss (IL), which discourages many from contributing liquidity. STON.FI—a top-tier decentralized exchange (DEX) on The Open Network (TON)—is tackling this issue head-on with its innovative impermanent loss protection, making liquidity provision both safer and more profitable.
Before diving into how impermanent loss protection works, let’s first understand what it means to be a liquidity provider and what impermanent loss actually is.
What is a Liquidity Provider?
A liquidity provider (LP) is an individual or institution that deposits assets into a trading platform—typically a crypto exchange—to ensure there’s enough liquidity for smooth transactions. LPs help stabilize markets by making tokens available for trades, which reduces volatility and narrows the bid-ask spread. On decentralized platforms like STON.FI, LPs add their tokens to liquidity pools and earn fees or rewards in return. For instance, if you contribute both ETH and BTC to a pool, you’ll receive a share of the fees generated by users who trade those tokens.
Understanding Impermanent Loss
Impermanent loss happens when the price of tokens in a liquidity pool shifts compared to their original value. AMMs automatically rebalance the token ratios in the pool to reflect market prices. If one token increases or decreases significantly in value while the other remains stable, LPs may end up with less value than if they had just held the tokens outside the pool.
Example
Imagine adding 1 BTC (worth $30,000) and 30,000 ETH to a pool. If BTC jumps to $40,000, the AMM rebalances the pool, giving you fewer BTC and more ETH. When you withdraw, your total asset value might be lower than if you had simply held the original assets. This discrepancy is called impermanent loss—and it becomes permanent once you withdraw your funds.
What Causes Impermanent Loss?
1. Price Changes: AMMs maintain balance in pools, so if one token’s value rises or falls sharply, the ratio is adjusted, possibly reducing your gains.
2. Market Volatility: Big price swings in either token can significantly amplify impermanent loss.
3. Arbitrage Traders: These traders exploit price gaps between pools and external markets. Their actions shift token balances in pools, sometimes to the detriment of LPs.
How STON.FI Solves This Problem
STON.FI introduces several innovative features to mitigate impermanent loss and protect LPs:
1. Time-Based Protection: STON.FI gradually covers your impermanent loss the longer you keep your tokens in the pool. For instance, after 100 days, you could receive up to 100% IL protection, allowing you to earn without worrying about market swings.
2. Higher Returns Through Fees and Rewards: STON.FI handles high-volume, low-slippage trades that generate substantial fees. These earnings are shared with LPs and can even outweigh potential impermanent losses.
3. Smarter Liquidity Pools: With advanced algorithms and the TON blockchain’s ultra-fast infrastructure, STON.FI reduces volatility within its pools.
4. $STON-Backed Insurance Fund: STON.FI uses its native token, $STON, to support a reserve fund that can compensate LPs for losses, adding another layer of financial security.
5. IL Calculator Tool: To help LPs estimate potential losses, STON.FI offers a dedicated impermanent loss calculator. You can test it out here with this URL; https://tools.ston.fi/impermanent-loss-calculator.
6. Omniston protocol: Omniston aggregates liquidity from multiple sources within the TON ecosystem. This means users can access the best possible swap rates for all tokens on the TON network, directly through the STON.FI interface.
Why IL Protection is a Game-Changer
Liquidity is the foundation of DeFi, but the fear of impermanent loss often keeps would-be LPs on the sidelines. With STON.FI’s robust IL protection, more users are empowered to contribute, which leads to deeper liquidity, smoother trading, and a more resilient DeFi ecosystem.
STON.FI not only minimizes fees and slippage but also supports cross-chain swaps, pushing the boundaries of what DEXs can do. Its user-focused features make it a standout choice for anyone looking to earn from DeFi without unnecessary risk.
Why Choose STON.FI?
1. TON Blockchain Advantage: Enjoy fast, secure, and scalable trading.
2. User-Centric Design: Easy integration with TON wallets makes onboarding seamless.
3. Cross-Chain Capabilities: Swap assets quickly without third parties.
4. Governance and Rewards: Use $STON to vote on proposals and earn through staking.
5. Arbitrary Provision: A revolutionary feature that allows LPs to deposit tokens in any ratio—no more strict 50/50 requirements.
