Risks
Last updated
Last updated
Whenever using an AMM, there are always two risks:
Contract Risk - Is the smart contract written securely? Has it gone through audits? And yes we have! See Risk Assessment.
Impermanent Loss / Depeg Risk - Impermanent Loss is a general term for value lost in your deposit as the price moves away from the original price at the time of your deposit. For stable swaps that market make between pegged assets, we generally call this depeg risk. This is because stable swaps mostly think about depeg events because for the most part, tokens either stay pegged in which case there is no Impermanent Loss, or a token totally depegs and there will be very significant Impermanent Loss if there are not other mitigating factors. There are cases of moving pegs which we will discuss later.
Depegs are rare but catastrophic events in DeFi and previous stableswaps have exposed users to the full loss of a depeg. For example, if you LP into the DAI-USDC-USDT pool on Curve, and USDT goes to zero then:
DeFi would be going crazy if USDT is zero. It might be the end.
Your LP position would end up holding entirely USDT and be worth nothing.
If USDT doesn't go to zero, but partially depegs to say 50 cents, that's still pretty bad and your LP deposit would have lost a little less than 50 percent of its value. The greater the depeg, the closer you LP's losses matches the depeg's losses.
Unlike other stable swaps, depeg events don't send our LPs to zero. And we ensure that with two separate approaches:
Active Intervention - One of our monitoring systems indicate a depeg and governance has allowed us to take prompt action.
Passive Intervention - The protocol itself has safe guards that mitigate depeg risk and no third-party intervention is required.
You can simulate depegs on our multipool yourself
We have security firms that monitor asset prices and transaction activity to readily report any potential depegs to us. If one looks sufficiently risky to the Burve team, and governance has previously agreed to allow us to intervene under the given conditions, then we will lock a vertex which prevents users for adding more of the risky token into our pool. This completely stops our LPs from accumulating any more losses.
The contract itself also limits the amount of one token it can accept. When all tokens are in balance, we call that balance the target balance. Burve's Multi-pool contract cannot accept more than twice the target balance for any token (currently twice but this can be adjusted by governance).
This means an multi-LP can at most lose roughly 2 / N of the original LP value due to the depeg where N is the number of tokens in your multi-LP. For example, if you're only LPing two tokens, then the effects of a depeg would match existing stable swaps like Curve. But if you're LPing for 8 tokens, then you'll only lose ~1/4th of the LP value instead of all of it.
We have a more precise simulator coming soon!
Effectively, once a token's price goes off peg too far, the contract simply stops accepting more of it. If the price recovers then the contract will naturally start selling it again and collect fees as if nothing has happened.
A very fair criticsm of Burve's Multi-Pool is that if a token depegs, then once it is out of Burve's accepted range Burve no longer helps with price discovery (the process of finding a fair price for the token). That's true and that's intended! Price discovery is not an easily profitable process and these days DeFi has enough professional market makers that we should really just leave it up to them! Our LPers don't have a moral obligation to always help with price discovery, especially when it gets too risky, so our simple solution is to simply not do it.
Liquid staking tokens (LSTs) are pegged to their base token but their wrapped version usually accumulates value and their peg grows over time.
In a normal AMM, in order to reflect that change, a trader comes into the pool and swaps the tokens until the price reflects the new peg. In the process, the trader extracts value through this arbitrage and LPers lose a little to impermanent loss. Over time, this IL can add up to a significant amount!
So Burve says, "why don't we just capture that IL ourselves and give it back to our LPers?" Since that peg is reported on-chain at all times by the LST's vault, the Burve contract always checks with that reported peg before every swap to adjust the swap value accordingly. This completely eliminates any IL from moving pegs.