The team behind the decentralized protocol Crypto Volatility Index (CVI) has launched an impermanent loss (IL) protection solution called “Armadillo” designed to help liquidity providers (LPs) mitigate losses during market volatility.
Solve the problem of impermanent loss
Due to the volatility of cryptocurrencies, liquidity providers often suffer from impermanent losses when the price of their crypto assets changes after they have been staked or deposited into liquidity pools. A study conducted in 2021 confirmed that 50% of Uniswap V3 LPs lost more money than cryptocurrency holders due to IL.
The CVI team intends to use Armadillo to address impermanent losses by implementing strategies that allow LPs to enjoy the benefits of providing liquidity while hedging losses.
“Aradillo will enable liquidity providers to limit their exposure to the volatility of underlying token deposits in liquidity pools. Given our extensive experience building risk management solutions such as CVI, ETHVI, volatility tokens, etc.,” the team said.
how does this work
According to a press release shared with CryptoPotato, the armadillo was designed as an insurance contract. The solution allows liquidity providers to purchase custom coverage that matches their associated pairings and period-specific amounts.
“During the coverage period, users will be protected against any non-permanent loss that occurs within the specified asset and specified date range,” the team said.
Insurance contracts are issued in the form of non-fungible tokens (NFTs) representing the insurance amount, duration and specified token pair. The release also states that users will receive a refund if they suffer impermanent losses during the coverage period.
Armadillo is a cross-chain solution that can be used on any decentralized exchange (DEX) or liquidity platform. IL protection was previously available in beta, but is now available in alpha with more features.
The CVI team noted that the name of the product was derived from the armadillo animal, adding that the solution was designed to prevent market manipulation and attacks. The team claims that premiums paid for the policy are “completely decoupled”, eliminating counterparty risk for protected liquidity.
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