This post seeks to find out whether the Uniswap community would be interested in having a Hedge against Impermanent Loss available for its liquidity providers.
Liquidity providers in AMMs are facing the risk of Impermanent Loss. The losses caused by this risk can be substantial and can potentially deter users from providing liquidity. Having a substantial amount of liquidity not only in major token pools but also in the mid and small sized tokens is necessary for the future of DeFi that lies in composability and swapping is the main building block today and tomorrow.
Providing liquidity providers with an option to hedge fully or partially against Impermanent Loss would likely increase the volume of assets in Uniswap's liquidity pools. This would stabilize liquidity availability as users would feel more secure about their investments and be less inclined to withdraw their capital. Additionally, new tokens are more likely to be listed on Uniswap, as the availability of this feature could be a key factor for the communities of newly listed tokens.
The design is straightforward. At its core is a liquidity pool that matches underwriters and buyers. On one side, buyers purchase the Hedge against Impermanent Loss, with the liquidity pool acting as the counterparty. On the other side, underwriters take on the Impermanent Loss risk. The liquidity pool ensures that buyers and sellers are matched over time..
This hedge fully covers the Impermanent Loss, with a small excess payout due to the discrete nature of the hedge. For example, if the Impermanent Loss from a 10% price shift results in a $20 loss, the hedge would compensate $20, plus a small additional amount. Buyers pay a premium to acquire this coverage.
The Hedge against Impermanent Loss is priced using a European options model. This approach offers two benefits:
In the background, the hedge is constructed as a portfolio of options with strike prices spread out to match available market conditions, resulting in a payout curve that has linear segments.
We are Carmine Finance. Team of developers on a mission to handle risks in DeFi. My name is Marek Hauzr and I founded Carmine little over two and a half years ago.
The Carmine team has a strong track record in DeFi, Web3 development, and traditional finance, making us well-equipped to deliver on this project.
This post seeks to find out whether the Uniswap community would be interested in having a Hedge against Impermanent Loss available for its liquidity providers.
Liquidity providers in AMMs are facing the risk of Impermanent Loss. The losses caused by this risk can be substantial and can potentially deter users from providing liquidity. Having a substantial amount of liquidity not only in major token pools but also in the mid and small sized tokens is necessary for the future of DeFi that lies in composability and swapping is the main building block today and tomorrow.
Providing liquidity providers with an option to hedge fully or partially against Impermanent Loss would likely increase the volume of assets in Uniswap's liquidity pools. This would stabilize liquidity availability as users would feel more secure about their investments and be less inclined to withdraw their capital. Additionally, new tokens are more likely to be listed on Uniswap, as the availability of this feature could be a key factor for the communities of newly listed tokens.
The design is straightforward. At its core is a liquidity pool that matches underwriters and buyers. On one side, buyers purchase the Hedge against Impermanent Loss, with the liquidity pool acting as the counterparty. On the other side, underwriters take on the Impermanent Loss risk. The liquidity pool ensures that buyers and sellers are matched over time..
This hedge fully covers the Impermanent Loss, with a small excess payout due to the discrete nature of the hedge. For example, if the Impermanent Loss from a 10% price shift results in a $20 loss, the hedge would compensate $20, plus a small additional amount. Buyers pay a premium to acquire this coverage.
The Hedge against Impermanent Loss is priced using a European options model. This approach offers two benefits:
In the background, the hedge is constructed as a portfolio of options with strike prices spread out to match available market conditions, resulting in a payout curve that has linear segments.
We are Carmine Finance. Team of developers on a mission to handle risks in DeFi. My name is Marek Hauzr and I founded Carmine little over two and a half years ago.
The Carmine team has a strong track record in DeFi, Web3 development, and traditional finance, making us well-equipped to deliver on this project.
Agree, there are many different ways to look at the financial risks associated with LPing.
I would add one perspective: "I want to provide liquidity, collect fees, but in $ value I want to be stable. I don't need the upside and risk of ETH, BTC, etc. and I'm willing to pay some amount for it.".
I've heard this one quite often.
Agree, there are many different ways to look at the financial risks associated with LPing.
I would add one perspective: "I want to provide liquidity, collect fees, but in $ value I want to be stable. I don't need the upside and risk of ETH, BTC, etc. and I'm willing to pay some amount for it.".
I've heard this one quite often.
The interesting thing is that with the design we have in mind, the IL, the above, inventory risk,... would be quite easy to do, once we have the first one. Essentially we would "just" have to define the function of the risk/loss.
Hi @blockchainedu , thanks for this question.
The temperature check would ask whether Uniswap would be willing to help with financing the build, maintanance and improvements in exchange for exclusivity for the next 2 years.
This seems interesting. Would love to see it coming to life
Thank you for the response.
It would work with any "2-token" pool. The limit is that every separate design, i.e. UNIv2, v3, v4 or potentially anything else, would have to have separately implemented Impermanent Loss curve.
In UNIv4 it may be possible for the hedge to be part of the pool through hooks.
Agree, there are many different ways to look at the financial risks associated with LPing.
I would add one perspective: "I want to provide liquidity, collect fees, but in $ value I want to be stable. I don't need the upside and risk of ETH, BTC, etc. and I'm willing to pay some amount for it.".
I've heard this one quite often.
Agree, there are many different ways to look at the financial risks associated with LPing.
I would add one perspective: "I want to provide liquidity, collect fees, but in $ value I want to be stable. I don't need the upside and risk of ETH, BTC, etc. and I'm willing to pay some amount for it.".
I've heard this one quite often.
The interesting thing is that with the design we have in mind, the IL, the above, inventory risk,... would be quite easy to do, once we have the first one. Essentially we would "just" have to define the function of the risk/loss.
Hi @blockchainedu , thanks for this question.
The temperature check would ask whether Uniswap would be willing to help with financing the build, maintanance and improvements in exchange for exclusivity for the next 2 years.
This seems interesting. Would love to see it coming to life
Thank you for the response.
It would work with any "2-token" pool. The limit is that every separate design, i.e. UNIv2, v3, v4 or potentially anything else, would have to have separately implemented Impermanent Loss curve.
In UNIv4 it may be possible for the hedge to be part of the pool through hooks.
Hi kfx,
No vote here. Essentially I'm asking for feedback on the usefulness of a hedge against Impermanent Loss.
If it is possitive I will proceed with a temperature check
Hi kfx,
No vote here. Essentially I'm asking for feedback on the usefulness of a hedge against Impermanent Loss.
If it is possitive I will proceed with a temperature check
As Hayden himself mentioned, there's no one solution to impermanant loss and I do kind of think about how Uniswap itself tries to hedge against it for users who can utilize such features
https://x.com/haydenzadams/status/1374795486398459908?t=vyLQ5UbhZB7JW-ZGbojBmQ&s=19
@Marek what will be the options on the temperature check?
Hello Marek,
Could you clarify what is being proposed here? Specifically, if there’s a vote on this, what question will the DAO be voting on?
Love this concept. I'm assuming this will require V4 functionality?
As Hayden himself mentioned, there's no one solution to impermanant loss and I do kind of think about how Uniswap itself tries to hedge against it for users who can utilize such features
https://x.com/haydenzadams/status/1374795486398459908?t=vyLQ5UbhZB7JW-ZGbojBmQ&s=19
@Marek what will be the options on the temperature check?
Hello Marek,
Could you clarify what is being proposed here? Specifically, if there’s a vote on this, what question will the DAO be voting on?
Love this concept. I'm assuming this will require V4 functionality?
