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Impermanent loss is a significant risk for liquidity providers (LPs) in decentralized finance (DeFi). It occurs when the value of the tokens you’ve supplied to a liquidity pool changes due to price fluctuations. For instance, if one token increases in value while the other decreases, LPs can end up with less valuable assets compared to simply holding the tokens.

Example:

If one token in the pool increases by 5x, you could lose 25%📉 of the value compared to holding it separately.
If one token rises📈 and the other falls, the loss becomes even greater.

How STON.fi Helps🔎

This is how IL looks if it supported by pool

To alleviate this risk, STON.fi has introduced a partial protection mechanism in the $STON/$USDT pool. If impermanent loss reaches up to 5.72% (equivalent to a 50% asset value drop), the platform will automatically compensate users for this loss. This protection aims to help LPs avoid major losses caused by sudden price fluctuations, and the compensation is provided automatically, making it seamless for users. If you want you can also read Full Terms that Ston.Fi providing to Impermanent loss here.

Key Details:

Coverage: Protects against up to 5.72% impermanent loss.
Automatic Compensation: Compensation is provided automatically to LPs when the loss threshold is reached.
Compensation Limit: The system has a $10,000 monthly budget, with a maximum payout of $100 per user (paid in STON tokens).
Future Improvements: STON.fi plans to implement Weighted Pools to reduce the likelihood of impermanent loss even more.

The Benefits for Liquidity Providers:

Confidence: LPs can feel more secure knowing that they’re protected against substantial impermanent loss.
Reduced Risk: This feature makes DeFi more accessible and reduces the risks associated with liquidity provision.
Seamless Experience: Protection is automatic, so users don’t need to take any extra steps to benefit from it.

Future Developments:

STON.fi is continuously working on improvements, such as Weighted Pools, to make liquidity provision even safer and more profitable. This feature could soon be expanded to other pools, increasing protection across the platform.

Why This Matters:

This feature helps address one of the major concerns for liquidity providers, making DeFi a more attractive and less risky venture. It opens the door for more users to participate without fear of significant losses.

In this post, i collected all the essential information is summarized and presented in simple terms. For a more detailed explanation, with more pictures and calculation formulas you can read the full article here: blog.ston.fi/impermanent-loss