NIL (No Impermanent Loss) is a structured product protocol that enables users to go long or short impermanent loss on a given AMM token pair.
NIL utilizes a new crypto derivative and DeFi primitive (NIL contract) with a payout function that perfectly replicates the impermanent loss value (ILV) on a given AMM LP position using price oracles. Participants can use NIL contracts to go long/short impermanent loss in order to generate returns or hedge their LP positions.
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 are also required to deposit margin into their account, which is used for regular funding rate payments to Writers in exchange for their impermanent loss protection. 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.
Writers of NIL contracts deposit their collateral asset into a Writer Pool and earn yield from Buyer funding payments.
Writer deposits are aggregated in the Writer Pool and matched as collateral for all open NIL contracts that use the collateral asset as the base token in the AMM token pair.
All Writers with deposits in a Writer Pool have equal exposure to funding payments and IL risk across all open NIL contracts, proportionate to their ownership of the Writer Pool.
As the price of Token A moves against Token B over time, the impermanent loss value (ILV) for each contract changes
- As ILV goes up, Buyers can claim a higher amount when they close their NIL contracts.
- As ILV goes down, Buyers can claim a lower amount when they close their NIL contracts.
- ILV changes are aggregated across all active NIL contracts for the pool and marked-to-market in the Writer Pool. Through the Writer Pool, Writers are exposed to the aggregate ILV changes for all active NIL contracts that use their collateral asset as the base token in the AMM token pair.
- Buyers open NIL contracts with a specific AMM token pair and strike price, so they are only exposed to the ILV changes for specific the contracts that they opened (usually to hedge their LP positions).
ILV has a lower bound of 0 because the amount of impermanent loss incurred on an LP position is always greater than or equal to 0.
Buyers pay the Writer Pool a regular funding rate payment in exchange for impermanent loss protection. The funding rate is determined by the demand for contracts, supply of collateral, and the impermanent loss risk associated with each NIL contract’s strike price.
Funding rates are calculated on a per-contract basis and are reset every 24 hours (i.e. the “Funding Period”). At the beginning of each funding period, the funding rate payments from Buyers are sent to the Writer Pool.
In effect, when Writers deposit collateral into the Writer Pool, their ROI is a weighted average of the funding rates across all NIL contracts using their collateral asset.
When Buyers want to close their NIL contracts, they can submit a close request at any time, which is then processed before the next funding period begins.
When a NIL contract is closed, the ILV amount on that contract is finalized. Collateral equal to the ILV amount is taken from the Writer Pool and made available for the Buyer to claim. Any remaining collateral that was originally matched to the now closed NIL contract is freed up to be used as collateral for new NIL contract opens.
When Writers want to withdraw their collateral, they can submit a withdrawal request at any time, which is then processed before the next funding period begins. By withdrawing, Writers burn their Writer Pool tokens in exchange for their ownership stake of the Writer Pool’s assets less liabilities.
If a Buyer does not have sufficient margin to cover payment for the next funding period, the protocol will automatically close their NIL contracts and deduct a 2% liquidation penalty on the total value of their NIL contracts, which is held as protocol revenue.
The liquidation penalty will first be taken from the remaining margin in the Buyer’s account, then from the Buyer’s ILV claimable amount. Any remaining ILV from the Buyer’s contracts is then free to be claimed by the Buyer after the liquidation.
Buyers: NIL charges Buyers a 0.25% fee when they close NIL contracts as protocol revenue.
Writers: NIL charges Writers a 10% fee on funding payments as protocol revenue.