Pylon in Bear markets
It’s important to prepare for the worst, so let’s see what happens when ETH goes down to $500 from our $1,000 starting point.
The underlying pool will now have 14 ETH and $7,000. This is a mirror situation to the one in bull markets, where the ETH side has more tokens than before. Since Alice only supplied 10 ETH, the extra 4 ETH ($2,000) is used to compensate Bob. Like before, there is a gap of $1,000 from impermanent loss.
Pylon uses a number of mechanisms to make sure Stable withdrawals can be honored in full.
When Bob withdraws his money, his request will go through the Pylon reserves. Pylon saves a portion of its fees for a rainy day. In this case, $1,000 is only 5% of our initial capital, which can be accumulated over a fairly short period.
The rebalancing mechanism, the same that reduces impermanent loss in bull markets, ensures that liability for Stable LPs never gets too large.
When the Float token goes down in price, it will get a large chunk of the pool’s fees. New liquidity providers can join the pool to earn these yields, potentially while hedging their position. These LPs will thus supply extra USD to the pool to soften the blow.