The team behind the decentralized protocol Crypto Volatility Index (CVI) has launched an impermanent loss (IL) protection solution dubbed “Armadillo,” designated to help liquidity providers (LPs) mitigate losses during market fluctuations.
Solving Impermanent Loss Issues
Due to the volatile nature of cryptocurrencies, liquidity providers are often plagued with impermanent 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 compared to crypto hodlers due to IL.
The CVI team intends to use Armadillo to solve the issue of impermanent loss by implementing strategies that allow LPs to enjoy the benefits of providing liquidity while hedging against losses.
“Armadillo will enable liquidity providers to limit their exposure to the volatility of their underlying token deposits in liquidity pools. Given our extensive experience building out risk management solutions like the CVI, ETHVI, volatility tokens, and more,” the team said.
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 customized coverage that matches their relevant pairs and amounts for a specific period.
“During the coverage period, the users will be covered from any impermanent losses that occur 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 release also noted that users are refunded if they experience impermanent 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 launched in beta but is now available in alpha, with more features.
The CVI team noted that the product’s name was derived from the Armadillo animal, adding that the solution was designed to prevent market manipulation and attacks. The team claims that the premium paid for the policy is “fully decoupled,” eliminating counterparty risks for protected liquidity.