The team behind the Crypto Volatility Index (CVI) decentralized protocol has rolled out an impermanent loss (IL) protection solution called “Armadillo” to help liquidity providers (LPs) mitigate losses during market swings.
Solving problems with temporary losses
Due to the volatility of cryptocurrencies, liquidity providers are often plagued by temporary losses when the prices of their crypto assets change after staking or depositing them in liquidity pools. A study conducted in 2021 confirmed that 50% of Uniswap V3 LPs lose more money due to IL compared to crypto hodlers.
The CVI team intends to use Armadillo to solve the temporary loss problem by implementing strategies that allow LPs to enjoy the benefits of providing liquidity while hedging against losses.
“Armadillo will allow liquidity providers to limit their exposure to the volatility of their underlying token deposits in liquidity pools. Given our extensive experience building risk management solutions such as CVI, ETHVI, volatility tokens and more,” said the team.
How it works
According to a press release shared with CryptoPotato, Armadillo was designed as an insurance contract. The solution allows liquidity providers to purchase bespoke coverage that matches their relevant pairs and amounts for a specific time period.
“During the coverage period, users are protected against all impermanent losses occurring on the specific asset and across the specified date ranges,” the team said.
The insurance contract is issued as a non-fungible token (NFT) representing the coverage amount, duration, and designated token pairs. The press release also noted that users will receive a refund if they experience a temporary loss during their coverage.
Armadillo works as a cross-chain solution that can be used on any decentralized exchange (DEX) or liquidity platform. The IL protection was previously introduced in the beta version but is now available in the alpha version with more features.
Noting that the product name was derived from the Armadillo animal, the CVI team added that the solution was designed to prevent market manipulation and attacks. The team claims that the premium paid on the policy is “fully decoupled”, eliminating counterparty risk for protected liquidity.
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