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CoindiskusEnlightened
Asked: July 21, 20222022-07-21T05:48:34+00:00 2022-07-21T05:48:34+00:00

How do you protect yourself from impermanent loss in liquidity pool?

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  1. Coindiskus Enlightened
    2022-07-21T05:50:04+00:00Added an answer on July 21, 2022 at 5:50 am

    You can use Impermanent Loss Protection (ILP).

    ILP is a type of insurance that protects liquidity provides from unexpected losses.

    Liquidity provisioning is only profitable on typical AMMs if the benefits of farming surpass the cost of temporary loss. However, if the liquidity providers suffer losses, they can utilize ILP to protect themselves against impermanent loss.

    To activate ILP, tokens must be staked on a farm. Let’s use the example of the Bancor Network to understand how ILP works. When a user makes a new deposit, the insurance coverage provided by Bancor grows at a rate of 1% per day the stake is active, eventually reaching full range after 100 days.

    Any temporary loss that happened in the first 100 days or at any time after that is covered at the time of withdrawal by the protocol. However, only partial IL compensation is available for withdrawals made before the 100-day maturity. For instance, after 40 days in the pool, withdrawals receive a 40% compensation for any temporary loss.

    For stakes withdrawn within the first 30 days, there is no IL compensation; the LP is liable to the same IL they would have incurred in a conventional AMM.

    Happy Investing!!

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