What is Akronswap?
Last updated
Last updated
Akronswap is a decentralized exchange that protects liquidity providers (LPs) from negative loss-versus-rebalancing (LVR), currently the largest type of maximal extractable value (MEV), and thus significantly reduces risks for LPs. Because of Akronswap LP tokens' similar risk profile to interst-bearing tokens such as Aave's aTokens, Akronswap can be an optimal destination for interest-bearing token (ibToken) holders looking to restake their ibTokens to boost their yield without much change in risk.
It is hard for conservative LPs such as interest-bearing token (ibToken) holders to restake their ibTokens to DEX because of the increased risk stemming from LVR or impermanent loss.
LVR is a type of MEV that affects LPs and accounts for more value loss than all other types of MEV combined. LVR costs LPs 5–7% of their liquidity, resulting in hundreds of millions lost each year. When accounting for LVR, many of the largest liquidity pools are not profitable for LPs at all.
Check out the clearest explainer (in just 3 minutes) of LVR yet, from LVR co-inventor and Head of Research at a16z crypto here: https://x.com/a16zcrypto/status/1775991213268840545. As explained by a16z, money made by arbitrageurs is exactly the money lost by LPs through adverse selection, and this money lost by LPs is called LVR.
At the moment, the largest type of MEV is atomic swap arbitrage. And research finds that 80-90% of that value is captured by non-LPs, such as arbitrageurs, block builders and proposers. On Akronswap, it is the other way around: 80-90% of that value is captured by LPs.
How does Akronswap return 80-90% of LVR back to LPs? Research predicts that next generation AMMs will recapture LVR for LPs and that one of the primary approaches to giving LVR back to LPs is by implementing a dynamic swap fee mechanism. Akronswap does exactly that: implements a dynamic swap fee mechanism. In fact, Akronswap's dynamic swap fee gives back close to 100% of the LVR back to LPs so that arbitrageurs's expected profit becomes close to 0%. [Because the expected arbitrage profit not still greater than 0, arbitrageurs still rebalance the pool's price to the market price frequently.]
The dynamic swap fee is directly proportional to swap size so it provides good execution for small swappers. If swap size is small enough, swap fees can even be less than 0.01%.
During stable market regimes, LPs earn most of the fees from frequent-small-size swaps.
During volatile times, LPs capture a significant percentage of the arbitrage profits from arbitraguers through dynamic swap fees.
Because of dynamic swap fees, LPs become "passive arbitrageurs": LPs on Akronswap stop losing money to arbitrageurs and start earning money together with arbitrageurs.
Because of dynamic swap fees that is highly correlated to LVR, LPs expected APY is smoothed over changes in price. [In the graphs below, fees are underestimated in both cases because the calculation did not factor the fact that volume and thus fees usually increase with higher price change or higher volatility.] [LVR is a concept that incorporates impermanent loss (IL) and is usually greater than IL.] [The calculation for Akron APY assumes dynamic swap fees capture 80% of IL.]
For the first time, because of the smoothed APY, conservative LPs such as LSTs holders and interest-bearing token (ibToken) holders can be incentivized to restake their ibTokens to Akronswap to earn more with not much change in risk. [There is obviously risk of loss from huge price changes, but that risk is significantly reduced.]
Swappers who swap small sizes pay low dynamic swap fees. For example, if the price impact is 0.15%, traders pay a fee of at most 0.15%.
Traders are protected from front running, back running and sandwich attacks, which generate huge profits for attackers each week, because only one swap is allowed per block per direction.
Arbitrageurs can use Akronswap to earn profits more frequently because for small arbitrages swap fees are very low, reducing the hurdle for arbitrage.
