Yield Basis claims to solve the risk of impermanent loss by modifying automated market makers (AMMs) — the core structure of decentralized exchanges — to make liquidity provision more sustainable and profitable.
The project uses 2× leverage on liquidity, meaning liquidity providers borrow additional funds in the form of crvUSD, Curve Finance's decentralized stablecoin, to double their liquidity position in a trading pool such as BTC/USD. The borrowed amount is roughly equal to the USD portion of their deposit.
This leverage modifies how liquidity ratios adjust, which could eliminate impermanent loss. At the same time, it doubles the liquidity position, meaning liquidity providers could earn twice the trading fees compared to standard liquidity provision.
However, borrowing and rebalancing costs can outweigh fee earnings, making leveraged liquidity difficult to sustain. To address this, Yield Basis plans to concentrate liquidity where trading is most active, using Curve's CryptoSwap AMM, which could increase fee earnings. But managing concentrated liquidity requires active rebalancing, which can be costly.
To offset these costs, Yield Basis integrates crvUSD. Yield Basis liquidity providers who borrow crvUSD pay interest, and that interest would help cover rebalancing costs, alongside half of the AMM's trading fees. The remaining half of the AMM fees would go to liquidity providers and administrative costs to keep the system balanced.
