Impermanent loss insurance Meaning

A feature or third-party service that compensates liquidity providers for losses caused by price divergence in a pool. This is often offered as a "native" feature by certain decentralized exchanges (DEXs) to attract more capital and encourage long-term participation from conservative investors.

These insurance models usually require a "vesting" period. For instance, a protocol might cover 25% of the loss after 30 days and 100% after 100 days.

This rewards "sticky" liquidity and discourages mercenary capital that moves in and out of pools rapidly. Compensation is typically paid out in the protocol’s native token.

While this insurance lowers the barrier to entry for LPs, it can create "inflationary pressure" on the protocol token if large amounts of insurance payouts are required during a market crash. Therefore, the sustainability of the insurance model depends on the protocol's ability to balance its treasury and token emissions.