Hedging against Impermanent Loss

Hedging against Impermanent Loss smart contracts is a simple tool that will enable AMM liquidity providers to hedge against Impermanent Loss. In today's high-volatility and price-uncertain environment, the need for effective risk management tools is more critical than ever.

Carmine Finance has a simple goal. Take care of crypto risk.

The team behind Carmine Finance has been building risk management solutions for a couple years. Right now we are working on a smart contract that will hedge Impermanent loss and will enable the community to manage this risk and mainly build novel solutions on top of it thanks to the composability in DeFi.

The smart contract that will allow for hedging the Impermanent Loss will be built as a portfolio of options that has an opposite P&L curve to the Impermanent Loss. Because of the discreteness of options’ strike prices the hedge will not be perfect.

The initial version will cover Impermanent Loss of constant product function AMMs and the consequential versions will allow for a more generic version that will cover concentrated liquidity AMMs.

Example Implementation:

For example, consider a user who is providing liquidity to an AMM on Polygon. The objective is to offer a B2B2C solution with the AMM, allowing the user to hedge against impermanent loss directly. Here’s a breakdown of how it works:

1. User Interaction: As the user engages with the AMM, they are presented with an option to hedge against impermanent loss, seamlessly integrated within the AMM’s interface.
2. Hedge Purchase: The user decides to purchase the IL hedge. Behind the scenes, this process is efficiently managed to ensure ease of use.
3. Cross-Chain Operation: Funds are securely bridged from Polygon to Starknet. Once on Starknet, the IL hedge is executed using specialized smart contracts.
4. Tokenization and Bridging: The user receives an IL hedge token representing their hedged position. This token is then bridged back to the user's wallet on Polygon, enabling them to manage their hedge directly from their wallet.

Carmine Finance team has been working on and delivering on following projects

• DeRisk: A platform that facilitates independent risk monitoring and mitigation strategies, enabling users to safeguard their digital assets proactively.
• Options AMM: A foundational tool for the community to create diverse hedging products, allowing for flexible risk coverage tailored to their needs.
• Konoha: Governance framework that is an accessible and customizable system that empowers any Starknet protocol to innovate with token creation, distribution, and staking, reinforcing community-led governance."