Non-permanent loss refers to the condition where investors end up losing the assets they previously dedicated to providing liquidity to the liquidity pool.
Zircon Finance, an automated market maker (AMM) and decentralized exchange on Moonbeam, has announced the launch of a mainnet to address investor concerns related to volatile losses in decentralized finance (DeFi).
Non-permanent losses refer to the condition in which investors lose assets that they previously dedicated to providing liquidity to a liquidity pool in order to benefit from the returns. Dubbed Zircon Gamma, the mainnet network aims to counter such losses through one-way liquidity on the Moonriver network, which spreads or shares risk between a volatile cryptocurrency and a stablecoin.
For example, in the case of the ETH/USDC pool, Zircon allows Ether (ETH) to maintain full exposure while providing security through the stablecoin USD Coin (USDC). In addition, the mainnet allows both parties to receive swap fees.
As Zircon explained, liquidity pools like ETH double their returns compared to regular pools, but still face temporary losses. However, the native Async LPing AMM mechanism reduces the risk by at least 90%.
The mechanism does this by incentivizing liquidity pools to replenish lost ETH funded by earned fees. Speaking to Cointelegraph, Andrey Shevchenko, Zircon co-founder, revealed that his inspiration for building such a system came from traders’ need for a flexible and permissionless solution, stating:
“Too many people have been incinerated by teams making fantastic but misleading claims to eliminate or compensate for irreparable losses. In some cases, the mechanism they offer (including dynamic fees) just doesn’t work.”
Shevchenko acknowledged the obvious default conditions should the token fall to $0, but stated that “However, Zircon is reducing it enough that intermittent losses are not an issue. In addition, we can use it to create options.”
Compared to existing players that provide protection against irreparable losses, Shevchenko highlighted numerous fail-safe mechanisms that help balance liquidity pools. However, he recommended users to do their own research when choosing trading pairs, adding that “this is an incentive-based economic system and you can expect it to work 99% of the time.”
Besides protecting users from irreparable losses, Zircon excels in providing liquidity directly to stablecoins and lower swap fees. “Overall, we will be a cheaper and more liquid option to trade anything but really popular pairs for Uni V3,” concluded Shevchenko.
Also see: The liquidity protocol uses stablecoins to ensure fluctuating losses do not occur
A recent white paper published by Trader Joe, an avalanche-based DeFi protocol, also claims to have solved the intermittent losses problem.
The white paper details the use of the Liquidity Book (LB), which introduces variable swap fees to “offer traders trades with little or no slippage.”