Launched on March 7, Lava is a decentralized loan market platform.
According to a press release provided with Cointelegraph on March 7, Lava’s technology would allow automated market makers (AMMs) to optimize liquidity across numerous blockchain networks and prevent temporary loss.
As per John Lo, managing partner of digital assets at Recharge Capital, impermanent loss is a problem for all liquidity providers in decentralized exchanges. He informed Cointelegraph.
“This is not only a major pain point for users, but also an issue that has caused a regression toward traditional architecture and one that prevents efficient markets on-chain.”
Impermanent loss, which occurs when a user deposits a token in an automated market maker based on a liquidity pool as part of yield farming, an investment strategy where one lends tokens to earn rewards (not the same as staking), is frequently viewed as one of the biggest drawbacks of decentralized finance (DeFi). It’s one of the primary causes of institutional investors’ reluctance to make investments in DeFi.
Lo claims that a new paradigm for DeFi protocols will be made possible by the capacity to limit impermanent loss.
“[This] opens a new dimension where DeFi can democratize market making as opposed to regressing back toward traditional finance architecture as well as allow market making and capital efficiency to compete against centralized venues. Alternative market makers already provide various benefits over traditional architecture, and Lava completes, if not unifies these benefits,” Lo said.
Lava’s new platform, which is supported by Recharge Capital, intends to increase market depth in the cryptocurrency space and empower liquidity providers. Market liquidity is measured by the quantity of open buy and sell orders for a given security or crypto asset.
Lava asserts that it is the first platform to address transient losses in DeFi by facilitating market maker rate arbitrage via the lending and collateralization of liquidity positions.
The platform will make it easier for customers to optimize yield for passive liquidity providers by allowing them to arbitrage between DeFi and centralized finance protocols in order to find an efficient market rate.
Currently running on the Base and Arbitrum blockchains, Lava is a multichain platform. In the future, the protocol intends to expand to additional blockchains.