Hedge with Impermanent Gain
Last updated
Last updated
without leverage:Holding 1 Long token can offset the potential rist for a LP position of 1 DAI.
with 10x leverage:Holding 1 Long token can offset the potential rist for a LP position of 10 DAI.
For example, a liquidity provider who holds a 10,000 DAI-Altcoin position would suffer a -3.17% IL (loss 317 DAI) if the altcoin falls 40% in the next month.
As we described in the last section, a -3.17% IL would result in a settled price of Long token: 0.317 DAI. It would require a total amount of 1,000 Long tokens for the liquidity provider to perfectly offset the loss of 317 DAI.
After holding enough Long tokens, the potential impermanent loss can be perfectly offset as long as the price of the altcoin is within the range of 39% to 254%. However, if the altcoin fluctuates beyond the above range, liquidity providers with Long tokens would still suffer some IL.
As a liquidity provider who would like to hedge against potential IL, the best timing to purchase Long tokens would be when the beginning altcoin's price of the round is the same as the LP's position opening price. While there is a difference in between, Long tokens might not be able to perfectly offset the IL for liquidity providers.
