Structured products are packaged financial instruments that use derivatives to achieve some specific risk-return objective, such as betting on volatility, enhancing yields, or principal protection.
Impermanent loss (IL), sometimes referred to as divergence loss, is a user's mark-to-market loss of tokens when they are provided into an AMM liquidity pool vs simply held in a wallet. IL occurs when the quantities of the underlying tokens in the liquidity pool change as token prices move.
An automated market maker (AMM) is the underlying protocol that powers most decentralized exchanges (DEXs). AMMs enable users to exchange cryptocurrencies by connecting users directly without an intermediary, but rely on set of users to deposit tokens into a liquidity pool.
Market participants generally provide liquidity on AMMs in order to earn trading fees. Crypto protocols commonly offer reward incentives to liquidity providers (LPs), further increasing their returns (e.g. yield farming).
NIL creates a market for impermanent loss protection, using a new DeFi primitive called a NIL contract that mirrors the mark-to-market impermanent loss value (ILV) of a given AMM token pair.
Buyers go long impermanent loss to hedge IL risk on their LP position. Writers go short impermanent loss to provide IL protection to Buyers, and earn regular funding payments in return.
Impermanent loss value (ILV) is defined as the exact value of tokens required to cover the impermanent loss incurred on an AMM LP position, given a set of starting and ending token prices and quantities.
NIL Contracts are a new crypto derivative and DeFi primitive with a payout function that perfectly replicates the ILV incurred on a given AMM LP position. Participants can use NIL contracts to go long/short impermanent loss in order to generate returns or hedge their LP positions.
No. NIL currently does not have a token, but we plan to in the future.
Please do not ape into any tokens that claim to represent the NIL protocol. We will list the token address in our docs when the time comes.
NIL is being built by Ionic Labs, a small team of crypto-native degens that have decades of experience designing and building software at leading DeFi and web2 companies.
Writers deposit collateral into a Writer Pool that may be used for impermanent loss protection. In return, they receive continuous funding rate payments from Buyers who have open NIL contracts.
A Writer Pool holds all Writer collateral deposits for a specific base token, and matches collateral proportionally to open NIL contracts. Writer Pools enable a pool-to-peer collateral model and its assets serve as the collateral backing impermanent loss protection purchased by Buyers.
When Writers deposit collateral into a Writer Pool, they receive ERC20 pool tokens that represent their ownership stake of the pool's assets less liabilities.
For a more detailed overview of Writer Pools, please refer to the "Writer Pools" section in Writers.
In exchange for providing impermanent loss protection, Writers earn an attractive return that is non-correlated with stablecoin borrowing demand, does not express a directional view on token prices, and does not require them to hold anything besides their collateral asset.
Writers can range from everyday investors to sophisticated volatility traders. Similar to several popular decentralized option vault (DOV) products, NIL offers Writers a simple way to earn returns from volatility selling investment strategies.
Buyers open NIL contracts to receive protection against impermanent loss on their AMM LP positions. In exchange, Buyers pay a Writer Pool regular funding rate payments.
By paying for impermanent loss protection, Buyers eliminate uncertainty on the losses they may incur by providing AMM liquidity. This is highly valuable because LPs can collect trading fees and yield farming rewards without needing to worry about realizing any impermanent loss.
Instead of guessing whether fees and rewards will make up for IL, LPs can make a straightforward comparison between the annualized returns from providing liquidity to the costs of IL protection.
Buyers can range from everyday AMM liquidity providers, to market-neutral institutional funds, to protocol DAOs, to degen yield farmers. NIL offers Buyers a simple way to hedge impermanent loss risk on their LP positions, or for sophisticated volatility traders to simply go long pair-volatility.
For more info on how different types of Buyers could use NIL, please see the "Use Cases" section.