Impermanent Loss Protection

IL protection model overview

How does Impermanent Loss Protection work?

On standard AMMs, liquidity providing is only profitable if the rewards earned from farming outweigh the impact of impermanent loss. At CarboSwap, we recognize that liquidity forms the backbone of the protocol, and we believe our users should not be penalized or asked to take on additional risk for making a vital contribution to the community.

This is why we've implemented Impermanent Loss Protection, an insurance pool that covers liquidity providers against impermanent loss.

Tokens must be staked in a Turtle Farm to activate the Impermanent Loss Protection. Coverage starts at 0% and increases by 2.5% daily on a linear vesting schedule for 40 days, at which point 100% coverage remains active until LP tokens are unstaked from the farm.

If more LP tokens are added later, a new vesting schedule is established only for those added tokens; the schedule for existing deposits does not reset.

Withdrawing any portion of funds from a farm will trigger a claim for any accumulated Impermanent Loss Protection and cause the vesting schedule to reset. Coverage is allocated on a continuous basis per farm per wallet, meaning that claiming and redepositing LP tokens after 100% coverage has been unlocked will not reset the claimable amount; realized claims are simply subtracted from future claims within the same farm. Coverage remains dynamic after becoming fully vested according to changes in IL, meaning that claim amounts can still down after 100% has been achieved.

Impermanent Loss Protection claims are paid in CARBO, and coverage only extends to impermanent loss, not regular losses caused by declining token prices. Coverage extends in both directions, meaning that if the price of CARBO or the paired token surges relative to the other, you will still receive CARBO as compensation for the opportunity cost from provisioning liquidity rather than holding each token individually.

How is the Insurance Pool funded?

Impermanent Loss Protection coverage is funded by the paperhand fee applied to our Turtle Pool.

How is Impermanent Loss Protection calculated ?

Claims are calculated by comparing the price ratio of the tokens in an LP pair at the points of deposit and withdrawal. The vesting schedule is designed to reward long-term contributors to the protocol. There are no fees for early withdrawals, but remember coverage is prorated based on the number of days LP tokens have been staked in the farm.

The maximum amount of Impermanent Loss Protection available in a given farm is capped based on the daily pool rate for a given farm. If a farm rewards 50 CARBO/day, an equivalent amount of CARBO is unlocked from the insurance fund, raising the ceiling of CARBO available for liquidity providers in that farm.

In the rare case that total claims exceed the total coverage allotted, individual claims are determined by the percentage of the total liquidity provided by the wallet holder divided by the available allotment.

How do I claim my Impermanent Loss Protection?

Impermanent Loss Protection is claimed whenever you harvest your rewards from a Turtle Farm but you can also claim it if you withdraw your LP tokens from the Turtle Farm.