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Impermanent Loss Insurance
Providing a secure and effective way to guard against instances of impermanent loss.
Impermanent loss (IL) in automatic market maker (AMM) liquidity pools has inherently become one of main associated risks that individuals consider when providing liquidity to AMM pools. Protocols like Bancor offer protection at the expense of their BNC token - providing liquidity providers (LPs) compensation when IL occurs.
This is unsustainable in the long-term. We want to provide a solution to protect our users without adversely affecting the MOZ token, while simultaneously leveraging our institutional background. We want to be able to create optional insurance for our users that don’t mind reducing their potential profit to guard against any instances of IL. This solution needs to be low-maintenance, cost-effective and provide a comprehensive hedge against such risks.
Upon investigation of various IL protection solutions, we have discovered [redacted] and their simple, yet comprehensive and intuitive solution to safeguarding against IL. Perpetual and futures are common instruments for hedging risk, but losses incurred by LPs in AMM pools is not linear but bidirectional as IL occurs in both directions of price movement. [redacted] focus on exotic options and structured products where a user simply pays a fixed premium upfront and will be fully reimbursed for the actual IL at expiry.
IL Protection Example
This has numerous benefits over other hedging strategies:
  • Known all-in cost;
  • Perfect hedge, zero residual risk;
  • No rebalancing, zero maintenance;
  • No option knowledge required;
  • No quant tools required
The premium for this IL protection is tied to the levels of implied volatility. Greater volatility will incur more expensive premiums for protection.
Instead of offering this IL feature solely to Mozaic and its users, we would offer this service to the entirety of DeFi. To do this we will allow users to enter a pair (e.g. ETH/USDT) into a ‘calculator.’ Our tool will then automatically calculate the correct amount to hedge and the expiry date, where the user will nominate their desired coverage length. The user can then choose to pay and accept the coverage or simply decline. Allowing this tool to be integrated with all protocols will drive traffic to Mozaic and, as an added benefit, collect fees from such usage. This will bolster the Mozaic treasury.
Once Mozaic V1 has launched, we will integrate a Beta version of this tool, which will automatically determine the correct parameters and prices for IL protection on the Mozaic site but lead the user to the [redacted] site to ultimately execute. If enough interest is met, then both [redacted] and Mozaic will introduce an automatic and holistic solution directly on our site.
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