When we are Liquidity Providers on a DEX we often find ourselves in an impermanent loss position which might be scary and trigger unexpected exits with a loss if we panic. The Impermanent Loss occurs when one of your assets appreciates or depreciates relative to the other asset, it opens up an arbitrary opportunity for others to profit from because they are incentivized to equal the pools. And to counter these effects, ThorChain came up with an innovative way to keep investors at peace while the market moves in one direction and the other - Impermanent Loss Protection.
I am a Liquidity provider on ThorChain and am currently involved in two pools: RUNE:AVA and RUNE:BNB. As the entire market deflated most of the crypto assets went down in value, but there are some exceptions from that and one of them is represented by BNB.
- In the first pool RUNE:AVA as both assets went down the report of provided assets remained quite the same and I could reap the rewards from block rewards and fee earnings and which provides me an LP Realized Growth of 24.35% and an LP Annual Growth of 34.94%.
- On the second pool RUNE:BNB, the BNB evolved positively or rather stood stronger while RUNE plummeted alongside the other cryptos, so even if I am entitled to the rewards from block rewards and fee earnings, I would still be on the negative side on a return. But with the Impermanent Loss Protection which kicks in fully (100%) after 100 days while being a Liquidity Provider, I could reverse that to a positive gain which means an LP Realized Growth of 6.81% and an LP Annual Growth of 11.13%.
This shows that Impermanent Loss Protection from ThorChain is simply a lifesaver and motivates long-term Liquidity Providers by ensuring that while they provide liquidity in the end the worse case that can happen is as if they would just HODL their assets. If only all DeFi will have a mechanism like this I believe that it would strengthen the trust of investors participating in it and boost this entire industry.
The math behind the Impermanent Loss Protection (ILP) is pretty simple and Liquidity Providers will receive linear IL protection over the course of 100 days. Essentially this translates into the fact that you are receiving an additional 1% protection for every day that you provide liquidity.
- 15 days provided = 15% IL protection
- 75 days provided = 75% IL protection
- 100 days provided = 100% IL protection.
As can be seen above, after 100 days+, your pool will be fully protected until you withdraw from it which simply puts your mind at ease and ensures that you will be waking up on the right side of things, whether the market goes up, or down or assets get unbalanced. I am not taking it easy to participate in Liquidity Pools due to the Impermanent Loss, but having this protection mechanics makes me trust it more and be involved in ThorChain.
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Yo that's actully pretty awesome!
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That's exactly what I said when I saw my LP position turning from red to green with the IL Protection activating and reaching 100%.
Bancor was innovating to achieve impermanent loss protection. Great to have more projects pulling off the same. I'm patiently waiting for @leofinnace DeFi projects to eventually do the same.
!PIZZA
!CTP
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I agree, Impermanent Loss during a bear market is pretty harsh. Adding this kind of protection will motivate LPs to stay longer and ensure them they will not go broke based on a temporary evolution one way or the other. Still, it requires better tokenomics for the involved DeFi asset(s).
Bancor ended up facing some issues because of the features they implemented. Let's wish for better things for ThorChain. If there were some complex mechanism to pool multiple assets into a single pool where users can contribute only one asset, it would be amazing. But that would be a massive task to accomplish.
!PIZZA
I think it's really a great mechanism that would incentivize more users to contribute to liquidity pools with little to no risk at all. Thorchain is really one of the most innovative blockchains out there. I hope it can be replicated across other chains too.
Right, until 100 days passed in order to get 100% ILP I was in the red and now I can relax once again.
This is a nice initiative and I know with time another blockchain that provides LP will adopt this technique
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Would be cool to see more IL protection implemented also in other blockchains, which would surely bring more Liquidity Providers to the table. But you also need some healthy economics to do that as it is an effort to cover such impermanent losses.
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Defi is a good option to earn decent income but we also need to be careful with impermanent loss.
That sounds pretty amazing. What happens if there is a situation like UST where it got dumped on very hard? It's hard to guarantee everyone back their tokens.
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