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Impermanent Loss Protection
Elk liquidity providers are eligible for coverage against impermanent loss on a linear vesting schedule.
What is Impermanent Loss?
Liquidity providers on automatic market makers (AMMs) are subject to Impermanent Loss (IL): an excess loss that 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, IL occurs no matter which direction the price of the tokens goes (for a token trending upward, IL represents an opportunity cost). The more the tokens diverge, the greater the impact of IL:
To learn more about the effects of IL, we recommend playing with an Impermanent Loss Calculator. You can explore IL in greater depth through Elk Academy and our podcast.
How does Impermanent Loss Protection work?
On standard AMMs, liquidity provisioning is only profitable if the rewards earned from farming outweigh the impact of impermanent loss. At Elk, we recognize that liquidity forms the backbone of the protocol, and we believe our users should not be penalized or asked to take on additional risk for making a vital contribution to the community. This is why we've implemented Impermanent Loss Protection (ILP), an insurance fund that covers liquidity providers against impermanent loss.
Tokens must be staked in a farm to activate ILP. Coverage starts at 0% and increases by 2.5% daily on a linear vesting schedule for 40 days, at which point 100% coverage remains active until LP tokens are unstaked from the farm. If more LP tokens are added later, a new vesting schedule is established only for those added tokens; the schedule for existing deposits does not reset.
Withdrawing any portion of funds from a farm will trigger a claim for any accumulated ILP and cause the vesting schedule to reset. Coverage is allocated on a continuous basis per farm per wallet, meaning that claiming and redepositing LP tokens after 100% coverage has been unlocked will not reset the claimable amount; realized claims are simply subtracted from future claims within the same farm. Coverage remains dynamic after becoming fully vested according to changes in IL, meaning that claim amounts can still down after 100% has been achieved.
ILP claims are paid in ELK, and coverage only extends to impermanent loss, not regular losses caused by declining token prices. Coverage extends in both directions, meaning that if the price of ELK or the paired token surges relative to the other, you will still receive ELK as compensation for the opportunity cost from provisioning liquidity rather than holding each token individually.
How is the Insurance Pool funded?
ILP coverage is paid from a dedicated insurance fund consisting of 10 million ELK established with the initial creation of the ELK token.
How is ILP calculated?
Claims are calculated by comparing the price ratio of the tokens in an LP pair at the point at the points of deposit and withdrawal. The vesting schedule is designed to reward long-term contributors to the protocol. There are no fees for early withdrawals, but remember coverage is prorated based on the number of days LP tokens have been staked in the farm.
The maximum amount of ILP available in a given farm is capped based on the daily pool rate for a given farm. If a farm rewards 100 ELK/day, an equivalent amount of ELK is unlocked from the insurance fund, raising the ceiling of ELK available for liquidity providers in that farm. In the rare case that total claims exceed the total coverage allotted, individual claims are determined by the percentage of the total liquidity provided by the wallet holder divided by the available allotment.
Let's look at an example:
Lewis adds $1000 in liquidity to ELK-USDC farm, consisting of $500 ELK and $500 USDC. The farm offers a pool rate of 50 ELK/day.
After 40 days, Lewis has unlocked 100% coverage, and the total amount available for ILP is 2000 ELK (50 ELK/day * 40 days).
The price of ELK increased 300% over that period, while the price of USDC remained unchanged. If Lewis had held his ELK and USDC individually rather than pooling them together, he would have $2000 ($500 USDC and $1500 ELK). However, his LP tokens are now only worth $1732.05, representing 13.4% IL based on the price divergence between ELK and USDC (see the Impermanent Loss Calculator to confirm these values).**
This means that Lewis is eligible for $267.95 ($2000 - $1732.05). He will receive the full amount paid in ELK when he withdraws as long as the total claimable amount do not exceed the available 2000 ELK divided by his portion of the total liquidity deposited in the farm.
In this scenario, the price divergence is relatively high. If your token values only vary slightly, your ILP claims may be very low. For example, in the above scenario if the price of ELK had only increased 10% rather than 300%, the IL claim would only be 0.11% or $1.19.
**Excludes farming rewards and fees earned through trading. All liquidity providers on ElkDex earn 0.3% of all trades, which are automatically added to the LP balance. Keep in mind that fees gained from pooling liquidity (i.e. swap fees) often more than make up for any impermanent loss suffered.
How do I claim my 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 IL 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.
ILP 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, which are needed to calculate claims. Once analytics are live, however, the ILP coverage will be retroactively applied based on the first day funds were deposited into the farm.