Trader Joe announces a novel AMM protocol

The decentralized exchange platform Trader Joe, running on Avalanche, introduced a new protocol called Joe v2 Liquidity Book. The whitepaper aims to solve impermanent loss faced by AMM users, as well as issues arising from Uniswap v3 and Curve v2.

The design of the new protocol revolves around arranging the liquidity of an asset pair into price “bins” so that when swaps are performed the funds available in these liquidity bins can be exchanged at a constant price. Only when a swap requires more liquidity than is available in a bin, can it move to the next bin. This allows liquidity providers to concentrate their liquidity around their preferred price range much like in Uniswap v3, however, with the possibility of delimiting their liquidity by two bins.

Furthermore, to respond to one of Uniswap v3’s most critical issues – impermanent loss, the proposed Trader Joe v2 Liquidity Book introduces variable swap fees. These fees are to have two components – a base fee and a variable fee. The base fee rate represents the minimum rate for all swaps, while the variable fee is designed to compensate liquidity providers when instantaneous volatility occurs, while also incentivizing them to actively manage their liquidity around a moving price.

The whitepaper proposes that by incentivizing liquidity providers to actively manage the price range of their liquidity, the new Liquidity Book’s market depth is likely to increase. Arranging liquidity into the newly introduced liquidity bins is also said to positively affect slippage on the platform.