In the previous article, we discussed that multi-token liquidity pools do not mitigate impermanent loss, even increase the risk of price exposure. However, recently I have seen some projects claiming that they use multi-token index funds to eliminate impermanent loss. But are they telling the truth? To answer this question, we need to understand the definition of impermanent loss, which is a difference in value between the value of participating in the automatic market making of the liquidity pool and not participating. Many automatic market makers such as uniswap use a constant product xy =k model to achieve automatic market making. In the process of automatic market making, the AMM pools always sell your high-value assets and then you hold more low-value assets, resulting in a difference in value from not participating in market making, which is so called impermanent loss. However, an index fund refers to building an investment portfolio by holding a variety of tokens with capitalization-weighted. In fact, It does not participate in market making for index funds which are only the role of a holder with no earning of trading fees. The profit and loss of an index fund depends on the weight distribution of the underlying assets. It has nothing to do with impermanent losses in automatic market making. So I think the project claiming to eliminate impermanent losses through multi-token index funds is just a gimmick of the project side, using an irrelevant concept as a publicity tool to attract investors.
