Impermanent Loss

Impermanent loss is the difference between holding tokens in your wallet versus staking them in a liquidity pool. When the value of tokens in the pool isn't stable, bots work to balance the ratio while profiting off of the price difference (arbitrage). This profit comes out of the pockets of liquidity providers. This mechanism is a core part of every AMM, yet it can hurt people giving liquidity to the pool.

Impermanent Loss Protection

Impermanent loss is a risk to be aware about when thinking about providing funds to a liquidity pool and especially in times of a volatile market it can result in providing liquidity to become unprofitable. If its not profitable there is a high chance that people will start removing money from liquidity pools resulting in even worse volatility. This can lead to a death cycle.

In order to prevent this from happening ThorChain implemented a mechanism to ensure that providing liquidity cannot result in more losses than holding or staking it. This mechanism is called Impermanent Loss Protection, in short ILP.

Note

In the following ILP will be referring to the ThorChain ILP implementation, not ILP in general.

ThorChains ILP Implementation

• After providing liquidity to a pool, your ILP will begin to ramp up slowly. Per day 1% protection is gained till you reach 100% after 100 days. After less than 24h no ILP is paid.
• Adding more liquidity to the same pool will result in your 100 day timer being reset
• When removing liquidity from a pool ILP will trigger
  • Protection paid = Impermanent loss * Protection percentage - Fees earned

On this graph you can see the amount of ILP paid in both Rune and USD Comparing to the price graph above you cant really see a clear relation between price and ILP paid, at least not with those currencies. (Except for the last spike that correlates with the LUNA drop) To understand where the other spikes come from we will take a look at the pools that required the most ILP at spikes in this graph.

Note

• USD is just a representation of the value that has been paid in RUNE, ILP cannot not pay in USD

TOP ILP Requiring Pools

April 28th till May 11th 2022

February 7th till February 11th 2022

January 3rd till January 9th 2022

Conclusion

• Spikes in ILP payments are usually caused by few liquidity pools experiencing big loss
• The general market trend does not seem to have a significant influence on the amount of ILP payments
  • The frequency of spikes on the ILP graph reduces but data on that is limited