Lava launches as decentralized lending market to optimize liquidity across blockchains
Lava, a decentralized lending market platform, has announced its launch on March 7.
Lava’s infrastructure will enable automated market makers (AMMs) liquidity positions to mitigate impermanent loss and optimize liquidity across multiple blockchain networks, according to a March 7 press release shared with Cointelegraph.
Impermanent loss is an issue for all liquidity providers in decentralized exchanges, according to John Lo, managing partner of digital assets at Recharge Capital. He told 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, often seen as one of decentralized finance’s (DeFi) greatest weaknesses, happens when the price of a token changes after a user deposits it in a liquidity pool-based automated market maker as part of yield farming — a type of investment in which one lends tokens to earn rewards (not the same as staking). It’s among the main reasons why institutional investors are hesitant to invest in DeFi.
According to Lo, the ability to mitigate impermanent loss will open a new paradigm for DeFi protocols.
“[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.
Backed by Recharge Capital, Lava’s new platform aims to empower liquidity providers and create greater crypto market depth, which refers to the market liquidity of a crypto asset or security based on the number of standing buy and sell orders.
Lava claims to be the first platform aiming to solve impermanent loss in DeFi by enabling arbitrage across market maker rates through the collateralization and lending of liquidity positions.
The platform will enable users to arbitrage between DeFi and centralized finance protocols to find an effective market rate while simplifying yield optimization for passive liquidity providers.
Lava is a multichain platform currently available on Arbitrum and Base blockchains. The protocol plans to extend to other blockchains in the future.
Related: Impermanent loss challenges the claim that DeFi is the ‘future of France’
