Zircon Docs

Reducing impermanent loss

Alice’s portfolio did a 3x while ETH went up by 4x. While this doesn’t sound great, remember that in a normal liquidity pool she’s forced to sell half her portfolio for USD, so her gain even without impermanent loss would be just 2x.
Can we deal with the impermanent loss? Yes.
Pylon uses a rebalancing mechanic that incentivizes people to add liquidity to the losing side. In our example with ETH at $4,000, the system thinks that the Stable LPs have 25% of the pool, so they get 75% of the swap fees. This serves to incentivize new Stable LPs to rebalance the pool (or for Float liquidity providers to leave).
Stable LPs can rebalance the pool by supplying a 50/50 mix of ETH and USDC. Pylon doesn’t care about the exact tokens you supply with, it only cares about their total value.
When the new Stable LP joins the pool, Pylon virtually swaps all the ETH to USDC, so now the LP doesn’t care about ETH’s price.
But the ETH they provided is very useful, because all of its price gains will be assigned to the Float side, reducing their impermanent loss.
For a 20x gain in ETH, regular Sushi/Uniswap V2 LPs will receive a 5x. With the basic Pylon mechanism, Float liquidity providers get a 10x gain.
While if new Stable LPs rebalance only 70% of what’s needed, Float Pylon LPs will get a 16x gain, plus their share of the swap fees.
What happens if the Float token collapses in price?
In Zircon Pylon, each pool is responsible only for its own compensation and impermanent loss.
It’s possible that pools with risky tokens will fail to compensate their Stable LPs. In this case, the LPs will get partially slashed if they withdraw their funds (in our example, Bob would receive $9,000 instead of the full $10,000).
If the pool continues to exist and earn fees, it will eventually get rebalanced and Stable LPs will recover their full amount. Because of this it’s important to choose a pool that fits your risk tolerance: an ETH/USDC pool is going to be much safer than a hypothetical SCAM/USDC pool