Be protected from Impermanent Loss
Liquidity farming comes with some risk, as does all manner of financial exploration. An eminent financier once stated:
“Never depend on single income. Make investment to create a second source.” – Warren Buffett
Yield farming is an opportunity for using digital assets to earn interest.
At Elk, we have created an insurance solution to protect liquidity providers from the effects of Impermanent Loss.
What is Impermanent Loss?
Liquidity farming allows you to earn interest on your digital assets.
- If both assets go up in value, your holding’s value also goes up.
- If both go down, your holding’s value decreases.
- If only one goes up then you will still see a holdings value increase but with a different ratio of assets, but it won’t be as profitable as if you held the assets separately – but it’s still profitable.
- The inverse will happen should one asset decrease.
Impermanent loss only becomes permanent when you remove your LP tokens.
Liquidity providers on automatic market makers (AMMs), like ElkDex, are subject to impermanent oss: this occurs when the price ratio of paired tokens diverges. As the price of each asset goes up or down relative to the paired token, the ratio of the underlying tokens will automatically rebalance to maintain equal price weighting. Whenever this rebalancing happens, however, there is an excess loss, which is called “impermanent” because it will be erased if the ratio between the underlying tokens reverts to the ratio at the time of deposit.
Impermanent Loss is therefore defined as the difference between the value of LP tokens vs. the theoretical value of the underlying tokens if they had not been paired.
Importantly, impermanent loss occurs no matter which direction the price of the tokens goes (for a token trending upward, impermanent loss represents an opportunity cost). The more the tokens diverge, the greater the impact of impermanent loss:
How do I claim my Impermanent Loss Protection (ILP)?
You have two options for claiming ILP:
- Option 1: Use the “Your impermanent loss coverage” claim button in the manage section for your farm. This option will claim any ILP and your funds will remain in the farm. After pressing the button, the ILP vesting schedule will reset to 0%. The value of both tokens will be recorded and become your new reference point for further impermanent loss calculations, and the claimed amount will be subtracted from future calculations.
- Option 2: Withdraw from the farm. This option will automatically claim the ILP along with any outstanding rewards and deposit both claims into your wallet. Your liquidity will be moved from the “Farm” tab to the “Pool” tab. You will continue to earn swap fees, but you will no longer receive farming rewards or earn any ILP. If you redeposit into the farm, the vesting schedule will reset with new reference points as above.
Using Moose NFTs to Increase ILP Vesting
Moose NFT holders accumulate ILP coverage at twice the standard vesting rate (5% per day vs. 2.5%) This benefit applies to all farms on the chain where the Moose is held. This benefit applies automatically and does not need to be activated.
Impermanent Loss Protection and Auto-compounding Vaults
If you are using auto-compounders, ILP coverage may be affected by other users depositing or withdrawing from the compounding vaults. Different protocols have devised various solutions for handling claims; please consult with the protocol’s support team to determine how ILP is handled.
ILP on Newly Launched Chains
ILP is typically not active initially on new chains due to subgraph support not yet being active. Once analytics are live, however, the ILP coverage will be retroactively applied based on the first day funds were deposited into the farm.
Read more about impermanent loss protection in our documentation.