Liquidity providers are subject to impermanent loss (IL): a loss that occurs when the price ratio of the two assets that make up the liquidity pair diverges. In any liquidity pool, as the price of each asset goes up or down, the ratio of the tokens you’ve provided will adjust to maintain equal price weighting. IL happens when liquidity is provided to a pool, and during that time the price of the assets change, compared to the price of them when they were added to the pool. The higher the deviation, the higher the exposure to IL. This will happen, no matter which direction the price of the tokens goes.
You can think of your liquidity position as a boat filled with water: if one side of the boat becomes too heavy, a little water spills over, offsetting some of the gains from transaction fees and rewards that you’ve earned by staking liquidity. This loss is considered “impermanent” because it will be recovered if the initial price ratio on your deposit is restored (i.e. the boat levels out again).
We hear you! That’s why Elk has your back. Our first and best defense against loss of value is our sound tokenomics, which are carefully designed to promote sustainable, long-term growth for ELK holders. But we also believe that none of our valued liquidity providers should walk away with less than they put in, period. This is why we are implementing Impermanent Loss Protection.
The pools will be paid extra ELK to make up for losses due to IL. If the price of ELK goes down relative to the partner token, you will receive additional ELK rewards when you unstake, ensuring that you won’t walk away with less than your initial deposit in dollar value. This coverage also goes both ways, so if the price of ELK goes up relative to the partner token, you will receive ELK to compensate for the opportunity cost from providing liquidity rather than holding each token individually.
Well, there’s a risk of that happening. That’s why we will not be paying the difference in one go; instead, the insurance coverage will increase over a period of 42 days. Yes, the magic 42. If you withdraw your liquidity earlier than 42 days, your IL protection will be prorated based on the number of days you’ve been in the farm. This also adds a long-term staking incentive. Additionally, there is a limit on how much will be paid per day from the insurance fund, which is equal to the daily rewards rate for the designated farm.
Important: in order to benefit from IL Protection, you will need to stake your liquidity pairs into the farm. It is not enough to just add liquidity to the pair, the Elk Liquidity Pair tokens must be staked in the farm! If you withdraw or exit from the yield farm, your coverage will be prorated based on the number of days you were in the farm. IL coverage increases by 5% each day, until reaching 100% coverage after 20 days. You may also add liquidity at any time afterwards; however, the IL coverage for the new amount will have a separate 5% daily vesting schedule. If you are using auto-compounders, the compounded amount may not be compatible with individual IL coverage--please direct questions to their project teams.
Good question! There is a specific pool to cover IL Protection. The initial funding for the IL Protection pool is based on the token allocation outlined in our litepaper. Impermanent loss is currently one of the largest roadblocks to widespread adoption across DeFi. IL Protection is just one of the groundbreaking innovations that will continue to position Elk at the forefront of the DeFi revolution.