Decentralized Finance (DeFi) is evolving rapidly, and with each market cycle, the need for safer, more accessible yield-generating tools becomes clearer. For retail investors, traditional liquidity provision often leads to unexpected losses—primarily due to impermanent loss (IL), volatile token pairs, and poorly structured incentives. As we approach the next bull run, a new paradigm is emerging: single-sided liquidity provisioning (SSLP).
This structural shift aims to protect capital while still allowing users to earn trading fees. By enabling investors to deposit only one asset into a liquidity pool, SSLP minimizes exposure to price volatility and eliminates the need for constant portfolio rebalancing. In this guide, we’ll explore five innovative approaches to single-sided liquidity, discuss their benefits and limitations, and highlight how they’re shaping the future of DeFi for retail participants.
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The Problem with Traditional Liquidity Provisioning
Liquidity provision has long been a cornerstone of DeFi. Through Automated Market Makers (AMMs), users supply equal values of two tokens (e.g., 50% ETH and 50% USDC) to a trading pair, enabling traders to swap assets seamlessly. In return, liquidity providers (LPs) earn a share of transaction fees.
However, this model comes with significant risks:
- Impermanent Loss (IL): When the price of one token fluctuates significantly relative to the other, LPs end up with more of the depreciating asset—resulting in real losses upon withdrawal.
- Token Volatility: Providing liquidity for speculative or low-cap tokens can lead to severe devaluation if the project fails or gets abandoned.
- Reward Depreciation: Many protocols incentivize LPs with native tokens that often lose value over time, eroding fee-based gains.
- Design Flaws: New pools may have untested mechanisms that expose LPs to unexpected risks.
These challenges make traditional liquidity provision risky for average users who lack the tools or expertise for active risk management.
The solution lies in either active risk mitigation—using complex hedging strategies or algorithmic rebalancing—or structural innovation, such as single-sided liquidity models that prevent IL by design.
Let’s examine five promising methods driving this structural evolution.
Method 1: Stablecoin-Centric Swaps
One of the safest forms of single-sided liquidity involves 1:1 pegged asset pairs, such as USDC/USDT or WBTC/renBTC. Because these assets are designed to maintain parity, impermanent loss is negligible under normal conditions.
Protocols like Curve Finance use specialized AMM algorithms (e.g., stableswap) that minimize slippage and keep prices tightly aligned. This allows LPs to deposit a single stablecoin and effectively avoid IL, assuming no major de-peg event occurs.
However, this approach has limitations:
- It only works with stable or highly correlated assets.
- Risks increase during de-peg events, as seen with UST or stETH, where one side of the pool can rapidly lose value.
- Yield opportunities are generally lower due to reduced volatility and arbitrage activity.
Projects like Stargate Finance and Platypus Finance enhance this model by using oracles to monitor price deviations and temporarily halt trades during extreme divergence—adding another layer of protection.
While limited in scope, stablecoin-focused SSLP remains one of the most accessible entry points for risk-averse investors.
Method 2: Native Token Single-Sided Pools
Some platforms allow users to provide liquidity using just one token—paired against the protocol’s native governance or utility token. Examples include:
- Bancor: Users deposit a single token (e.g., ETH), which is paired with BNT. The protocol uses dynamic token minting to offset IL.
- MonoX: Deposits are made in one token and paired with vUNIT, a virtual representation of pooled assets.
- Tokemak: LPs stake their tokens alongside TOKE, which acts as a yield-bearing governance asset.
The core idea is that the protocol absorbs IL by adjusting its native token supply or treasury holdings. For instance, Bancor mints additional BNT when losses occur, theoretically covering the gap between deposited value and withdrawn value.
But this creates new risks:
- Continuous minting exerts downward pressure on the native token’s price.
- In bear markets, fee income may not cover IL compensation costs.
- Centralization concerns arise when protocols make unilateral decisions about token supply.
Despite setbacks—like Bancor’s pause during the 2022 market crash—this model highlights how protocol-owned liquidity can offer structural advantages over traditional AMMs.
Method 3: Customizable IL-Bearing Pools
A more advanced approach allows certain parties—typically DAOs—to absorb impermanent loss on behalf of retail LPs. This is exemplified by Rift Finance, where DAOs provide one side of a liquidity pair (e.g., their native token) and agree to bear most or all IL.
Key features:
- Retail LPs deposit only ETH (or another base asset) and are protected from IL up to a threshold (e.g., 75% drop in DAO token value).
- DAOs gain efficient, sustainable liquidity without dumping tokens on the open market.
- IL absorption ratios are customizable, enabling tailored risk-sharing models.
This mechanism mirrors financial instruments like fixed-rate bonds, where one party assumes volatility risk in exchange for yield. As seen with Ondo Finance, similar risk-transfer principles underpin emerging DeFi-native structured products.
👉 Explore how decentralized risk-sharing models are transforming yield generation
Method 4: Oracle-Guided Dynamic Concentrated Liquidity
Newer AMMs like Maverick Protocol and GooseFX use dynamic concentrated liquidity and price oracles to reduce arbitrage-driven losses.
Here’s how it works:
- Liquidity is automatically concentrated around the current market price (as reported by oracles).
- Only trades that benefit LPs—i.e., those moving price toward equilibrium—are allowed.
- Arbitrageurs cannot exploit stale prices because the system enforces execution at the worst of oracle or pool price.
This reduces IL by aligning pool prices with external markets in real time. While oracle reliance introduces centralization and front-running risks, ongoing improvements in decentralized oracle networks are mitigating these concerns.
Method 5: Targeted Market-Making via Capital Lending
Hashflow takes a unique approach: instead of direct AMM participation, users lend capital to professional market makers who provide liquidity on their behalf.
Advantages:
- No direct exposure to IL—the market maker manages risk actively.
- High capital efficiency and tighter spreads.
- Users earn yield through loan interest rather than trading fees.
Critics argue this resembles centralized lending (like Clearpool), but it offers a pragmatic path to safer returns—especially for non-expert investors.
Frequently Asked Questions (FAQ)
Q: What is impermanent loss?
A: Impermanent loss occurs when the value of tokens in a liquidity pool changes relative to holding them outside the pool. It becomes permanent when you withdraw your funds after such a change.
Q: Can single-sided liquidity eliminate impermanent loss completely?
A: Not always—but structural designs like oracle-backed pricing, IL absorption by DAOs, or stablecoin pairing can minimize or neutralize it under most conditions.
Q: Are single-sided pools less profitable than traditional ones?
A: Often yes—lower risk usually means lower yield. However, net returns can be better when factoring in avoided losses and simplified management.
Q: Which protocols support true single-sided liquidity?
A: Notable examples include Bancor, Tokemak, Rift Finance, Maverick Protocol, and Hashflow—each using different mechanisms to achieve IL protection.
Q: Is single-sided liquidity suitable for beginners?
A: Yes—especially stablecoin-based or DAO-backed models that require minimal monitoring and offer built-in safeguards.
Q: How do I choose the right SSLP strategy?
A: Consider your risk tolerance. Stablecoin pairs are safest; native token pools offer higher yield but more risk; DAO-absorbed IL models balance both.
The Road Ahead
Single-sided liquidity provisioning represents a maturation of DeFi—one that prioritizes user protection without sacrificing innovation. As we move toward more sophisticated financial primitives like structured yield products and embedded risk calculators, SSLP will play a foundational role.
The most promising future lies in combining methods: integrating dynamic concentration, IL absorption, and time-bound positions with user-friendly tools that project break-even points and optimal exit times.
For retail investors, this means safer access to DeFi yields. For the ecosystem, it means sustainable growth driven by trust and resilience.
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