Mitigating IL
Mechanisms and guardrails for mitigating the risk of Impermanence Loss
Individual LPs usually view impermanent loss as the difference in the total value of the assets deployed after shifting of the ratio of the pool assets due to a change in their exchange rate (“sell the winner, buy the loser” – very similar to a constant mix strategy in portfolio management) compared to simply holding both assets.
OliveDAO views impermanent loss from the perspective of the negative change in the quantity of one of the assets deployed to an AMM trading venue.
OliveDAO has several mechanisms and guardrails put in place to mitigate IL risk to ensure that the liquidity providers can always claim their underlying assets deployed 1:1. These mechanisms involve some risk to veOLIVE stakers, but only as a last resort.
The protocol captures LP fees from providing liquidity across DeFi. It also has project tokens in its reserve. There are guardrails put in place to limit IL exposure. Then there are veOLIVE tokens staked by LDs which can be slashed but only as a last resort. This approach combined with other specifics of the system allows for the rebalancing of assets that should only result in a net loss on the system level in extreme market conditions.
All these mechanisms ensure Liquidity Providers can always claim their underlying assets 1:1 and not incur impermanence loss.

Risk Mitigation

The quantities of assets deployed to outside venues are dictated by the following guardrail factors.

Assets in reserve (eg ABC)

Do not deploy more than 3x the quantity available in the reserve ("Reserve Multiple")

LP provided quote asset available to pair with (eg ETH)

If not enough provided by LPs the available base assets are pro-rata distributed across Asset Jars.

veOLIVE staked to the Jar

Ideally, enough veOLIVE should be staked to the Jars to result in:
veOLIVE staked + ABC reserve = LP ABC, or in other words, two-thirds of the value of the deployed LP assets should be staked by LDs.
Note that these are starting parameters and we will be able to significantly relax these as more data becomes available. The detailed logic below is set up in such a way that if followed in order, will result in the correct deployed amount.

Deployment Logic & Equations

Based on assets in reserve

In a first step, the assets provided by the LPs (LPAsset) are passed through the first guardrail. The maximum amount of LP assets deployable (LPAssetDeployable) is determined by the assets available in reserve (3x). This guardrail is applied to both the LP provided assets and the Quote Jar.
This guardrail is calculated based on Qty.

Based on ETH available to pair

In a second step, the system compares the amount of available ETH in the Quote Jars (after applying the reserve guardrail) to the LP provided assets in order to determine if all assets can be paired up with ETH. If not enough ETH is available in the Quote Asset pool, the system will proceed by equally distributing the ETH across the Asset Jars.
This guardrail is calculated based on a notional value.

Based on veOLIVE Staked to the Jars

The last step is to assure a minimum amount of veOLIVE is staked to the Asset Jar by the LDs. While more veOLIVE can be staked to an Asset Jar the value of ABC deployed is not to surpass 1.5x the value of the veOLIVE staked to the Jar. This is calculated based on a notional value.
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Risk Mitigation
Deployment Logic & Equations