NIL Protocol
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Buyers pay regular funding payments to a Writer Pool, and in return receive protection against impermanent loss on their LP positions.
Buyers can perfectly hedge impermanent loss risk from their LP positions if they open NIL contracts with a strike price that matches the price of Token A when they enter their LP position.
Buyers open a NIL contract by paying in the mark-to-market ILV on the contract, the value of which they retain claims to. ILV goes up when the token price moves away from the strike, and vice versa.
If the current price of Token A is exactly the same as the strike price, Buyers pay nothing upfront to open a NIL contract, as impermanent loss and mark-to-market ILV is zero.
Buyers deposit margin into their margin account, which is used to pay continuous funding rate payments to the Writer Pool in exchange for their impermanent loss protection.

## User Flow

Here’s an example of how a Buyer would use NIL to hedge their LP position
1. 1.
Alice deposits 10 WETH and 10,000 USDC into WETH-USDC on Uniswap V2 as an LP
• The price of WETH at the time of her entering the liquidity pool was 1,000 USDC
• She has 20,000 USDC worth of exposure in her LP position
2. 2.
Alice wants to hedge out her impermanent loss risk, so she goes to the NIL dapp and looks at the funding rate for the UNIV2-WETH-USDC-1000
3. 3.
The cost of protection (funding rate premium) looks reasonable to her, so she deposits margin into her account and opens 20 UNIV2-WETH-USDC-1000 NIL contracts to fully cover the IL risk on her LP position
• Because the contract strike price is the same as the current price (ILV = 0), Alice does not actually pay anything upfront for her NIL contracts. Her only payment is through regular funding rate payments deducted out of her margin account
4. 4.
Funding payments are be deducted from Alice’s margin account each funding period, based on the funding rate and the total amount of NIL contracts she opened
5. 5.
As the price of WETH/USDC changes over time, the ILV of Alice’s NIL contracts is marked-to-market according to the impermanent loss value formula
6. 6.
When Alice decides to withdraw her liquidity from the WETH-USDC pool and no longer needs the impermanent loss hedge, she would also close her NIL position
• The ILV payout claimable from her NIL contracts will exactly cover the amount she lost in the liquidity pool due to impermanent loss
In theory, Alice could unwind her NIL position at any time (not necessarily when she withdraws liquidity from Uniswap). But in that case she would be speculating on IL, rather than hedging her LP position.

$Return_{\:BuyerLP} \:= \:LP_{Fees} + \:LP_{Rewards}\:+\:ILV_{Claimable}\:\:–\:\:Protection_{Costs}$