💧 AquaFi | Impermanent Loss Coverage? #XIOfeedback

In a core team meeting this morning, an interesting new way to think of AquaFi came up. What if instead of receiving a 10% premium on your LP tokens, people could request AquaFi coverage against impermanent loss

Here is a quick definition from Bancor on what IL is:

“Impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet. It occurs when the price of tokens inside an AMM diverge in any direction. The more divergence, the greater the impermanent loss. Why “impermanent”? Because as long as the relative prices of tokens in the AMM return to their original state when you entered the AMM, the loss disappears and you earn 100% of the trading fees.”

If built correctly, AquaFi could offer coverage against this IL in the form of Aqua tokes, while the protocol remains a portion of the LP token for perpetual liquidity fee generation

For example, you lock tokens into AquaFi. Those tokens lose $200 in IL. The protocol would cover a % (say, $150) of your IL but retain a portion of your fees generated (say $25)

Although it is still a very raw ideas, would love some first impressions on this concept. Would you use something like this? Would you give up 50% of your LP rewards in exchange for 50% protection against IL? What are some good or bad implications of this for the protocol? Leave your thoughts to this concept in the comments below! #XIOfeedback


That actually might be a very good idea because it addresses one of the problems of LP, adding more api is a nice to have, but fixing IL might be a key feature for the whole ecosystem.

If you asked me right now if i would prefer 10% more api or be 80% covered against IL, i would take the latter. The 50% of the rewards vs 50% IL coverage might already be a stretch though.

So i would say it’s all about the ratios. If 50% 50%, i think people might prefer the original idea of extra 10~25% rewards. I have no idea about what would be possible though

Best Regards

Sounds like a good idea i would prefer not to experience impermanent loss, but im also wondering if that is even possible would love to understand the math behind it.


Covering a large proportion of impermanent loss reduces risk for someone who wants to provide liquidity to earn fees. This allows someone who may have been on the sidelines to provide liquidity and earn fees.


The only negative I could see is that if alot of people suffer impermanent loss they may receive $AQUA to cover their loss and then sell the $AQUA to buy back the value of the token they suffered IL with. This could increase sell pressure. Some may just hold the $AQUA, its hard to know in advance.

What would I do:

If I was providing liquidity I would definitely give up 50% of my LP rewards in exchange for a 50% protection against impermanent loss.
If I believe in what a project is trying to achieve and expect it’s market cap to grow massively against ETH for example, I would not provide liquidity due to expectation of impermanent loss being greater than the fees to be earned. With AQUAFI it would reduce a large portion of impermanent loss and make it more likely for me to add liquidity to a project I believe in.

Additional thoughts:

  1. If LP tokens had a fixed IL coverage at 25% when using AQUAFI then perhaps AQUA could be the only token with double the coverage at 50% so it incentivises people to provide liquidity for AQUA without a XLP for AQUA protocol.

  2. If going down the route of variable coverage % could have a slider which starts with just 10% extra fee earnings with no IL coverage if slider fully left and 0% extra fee earnings and 50% IL coverage if slider fully right. If slider the middle, 5% extra fee earnings and 25% IL coverage. This allows people to have a bit of both :slight_smile:


I love this idea! It would be great to have a solution to minimize/avoid impermanent loss. That is something that could be really interesting to many people and drive attention to new eyeballs outside of the blockzero community.

Oh boy, this is a tough one. Impermanent loss is very difficult to predict and even calculate against the fees. I mean, I wouldnt know if I will be impacted more by impermanent loss or by giving away 50% of my fees to gain aqua as a coverage. We should see the numbers and some example. For example, why don’t you guys show what would have happened if I put my xlp liquidity tokens on aqua for the past 1 year? assuming the price of aqua will be the same as flash token.


I think this is a great idea. In my opinion, this provides a service that would be of great use to those in Liquidity Pools beyond greater financial yield. Removing (or limiting) Impermanent loss would allow people to maintain their holdings of both their assets (or just ETH). Ideally, this could be offered as one possible use case of AQUA, in addition to the original idea?
Maybe there could even be a few other possible uses of the AQUA token as well, with how it interacts with liquidity pools, thereby increasing its functional value?
Eg. the ability to increase the amount of holdings from your original 50/50 split of each token to a new ratio over a period of time; 75% ETH / 25% Alt as a possibility.

I think is two different things.
Maybe a new token?
I like the idea of boosting your LP yield, but I most worried about IL every time I add liquidity.

I have to say I do not align with this idea.

Don’t take me wrong, the idea is creative and an interesting twist on what could Aqua bring, but I think it is complex in terms of implementation and in terms of understanding for the user (or in another words, from a marketing point of view I find it more difficult to pitch and to grow).

I like the original idea more: simple and straightforward. You get more money if you use AquaFi for your LP tokens. That’s easy to understand for everyone in the cryptoworld and feel will attract more interest.

I wouldn’t either go to mixed formulas or even new tokens as other citizens comment, no offense to them. Great ideas are simple. Isn’t that what Bruce Lee tried to convey with his Be Water speech? :wink:


I really like the idea of avoiding impermanent loss - by using aqua.
Nice ide!

First thing I want to ask is how do I buy a Blockzero t-shirt? Thats one cool t-shirt!

Im afraid I dont like this idea of IL coverage and here is why:

  • LP’s are like business men/women. They provide liquidity because they want to put their money to use. They accept the risk but to them the reward is greater than the risk otherwise they wouldn’t provide liquidity. Therefore the whole notion of reducing your return to protect your Liquidity from IL goes against your risk analysis. If you are needing to insure your LP token, then you aren’t confident in your business decision in the first place. Let me give an example here. If a bank said to you ‘would you like us to partially protect your $20,000 because there is a chance you will lose some of your money or would you like to earn $200 a month instead’ what would you do? I would do neither and withdraw my money from the bank as I don’t trust them anymore! Similarly telling a LP to use Aquafi for partial protection of their liquidity because they may suffer impermanent loss is not an incentive to use Aquafi. If they believed their LP token is at risk of loss they would simply withdraw the liquidity. No one wants to lose their money. With this proposal you may get a select few LP’s using the protocol (possibly new LP’s who are afraid to take the risk) but not enough to sustain it as it will not appeal to the majority of LP’s (The veterans in the LP business who want large returns).

  • Since LP’s are business orientated, they will always follow the money. If Aquafi guarantees them an extra 10-50% in LP fees, then you can be sure a lot more LP’s will be using Aquafi protocol. The LP business is all about risking money to make more money, not protecting it. If they wanted to protect it, they would have just held the asset and not risk it in a pool. Its a risky business but every LP appreciates that risk. It is more appealing to be rewarded with money than to have your money protected.

Blockchain insurance is a whole different sector which I am following quite closely. Its an interesting area of development and competition is ramping up quickly. To be successful there, Aquafi will need to offer alot more than just LP protection.

Also I just want to clarify the bonus rate. You said 10-25% in the video above, however in the Aquafi trailer and Aquafi twitter page its says 10-50%. I think its important we clarify this position early on and amend the video/twitter page if required to not affect trust in the protocol later down the line.

Thanks Zach for asking our opinions on this. All of the above is just my opinion. Of course whatever the group decides I will be happy to support all the way.


I think this is a great idea. I am sure many people would prefer to defend against impermanent loss over certain 10%.

i think it’s a possibility, otherwise we all know that aqua value would go to zero because of the 10% more of fees that is paid in aqua… people would dump that without any doubt :wink:

the point now would be research what percentages are the best to fit this scenario…

p.s. now i’m much more excited about aqua… it’s really new with this impermanent loss coverage!

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Its seems to be an interesting application, its rather difficult to implement.

An additional idea i would like to propose - considering $AQUA represents the mix bag of LP assets, can $AQUA hodlers be given dividends from LP profits, this will add stickiness to the whole protocol.


  • oracle/API integration which can calculate impermanent loss
  • Scalability of model depends on success of $AQUA as a whole (people should be willing to hodl or we will see frequent sell offs)


  • user will get insurance for LP assets, in addition to premium of LP earnings → good utility

Let’s give user a choice to experiment with combination of = premium earning % + impermanent loss coverage %. Both should be inversely related, this would be interesting, user basis the risk appetite can interact with protocol and hedge/take risks.


As a user I would love to see three options:

100% added premium
50/50 added premium/IL protection
100% IL protection

I don’t know if it makes sense for the protocol to offer these for all LP tokens, but that is the quick feedback.

When looking at it from the protocol’s/tokenomics’ perspective, one may want to have a look at how Balancer uses:

The lower the pool fees, the more $BAL is awarded, according to a multiplier called feeFactor . More $BAL is also awarded to “useful liquidity”, using another multiplier called wrapFactor , to penalise pairs which are “soft-pegged” like USDC USDT .


For AquaFi this would relate to the proportion of Reward IL-Protection would cost, where a “safer” liquidity pair would cost less to provide IL-protection for.


I struggle slightly with the fundamentals in this question that is both, adding yield as well as covering partly IL.

From a market perspective I am fairly certain that adding yield is bigger than impermanent loss compensation.

Thinking about what we would like to see the token improve?
My preference is slighty towards the original idea (if I got that right - and feel free to correct me - the yield increases because investment is partly prolonged within the pool).
An insurance could work both ways: liquidity provider is more relaxed on volatility and hence sitting out some period, or liquidity provider has a lower exit barrier because the IL is reduced and weighs less.

Altogether, the new idea sounds good and interesting, but I would rather go with the original plan.

Interesting idea for sure. I think people adding to LP understand the risks involved. People are putting in liquidity so that they can get advantage of the additional fees. If we are providing a “coverage” of some sort that this might lead too more tokens being released ?

If the protocol is covering for insurance than that will definitely help ease some concerns and motivate people to not remove liquidity.

side note - When can i FLASHSTAKE my tokens to earn that T-shirt :slight_smile:

I think it’s a cool idea the coverage against IL because the market is always unpredictable and this is an insurance on profit. It’s better low sure profit than high risky profit.

This is an interesting one!

Personally I do not feel that impermanent loss is only negative. If I invest into two good long term assets in a certain pairing a feel comfortable to hold them long term and earn fees.
This strategy also helps me to have less of one assets(coins) when it pumps more in the short term, almost like taking profits and “buying” more of the other asset.

With all this in mind I would not like it if some of my earnings are used by Aqua to give me “insurance”
I would much rather get the additional earnings from Aqua with what it was originally meant to do - liquidity mining by locking my LP tokens in the protocol.

This decision depends on individual risk profile - maybe the token holder should have an option to choose one of the two?!


Drluke :stethoscope:


I agree and this is why I favor the option to choose.
I do not see just providing IL-Protection would be a good way to go for AquaFi.