Impermanent loss (IL) is the hidden cost of providing liquidity. While fee earnings can offset IL, large price movements can erode your capital. This guide covers advanced hedging strategies to protect your LP positions from significant IL.
Understanding IL Before Hedging
| Price Change | Impermanent Loss | Break-even APY Needed |
|---|---|---|
| ±25% | 0.6% | ~1% |
| ±50% | 2.0% | ~4% |
| ±75% | 3.8% | ~8% |
| ±100% (2x) | 5.7% | ~12% |
| ±200% (3x) | 13.4% | ~27% |
Hedging Strategy 1: Options
Buy put options on the volatile asset in your LP pair to protect against downside.
Hedging Strategy 2: Perpetual Shorts
Open a short perpetual position on the volatile asset to hedge directional exposure.
Hedging Strategy 3: Correlated Pairs
LP in pairs where both assets move together, minimizing divergence and IL.
Key Takeaways
- IL hedging has costs—only worth it for large positions or high-risk pairs
- Options provide defined-risk protection but require premium payments
- Perpetual shorts offer flexible hedging but need funding rate monitoring
- Correlated pairs naturally minimize IL without external hedges
- Calculate total cost (hedge + gas) vs expected IL before implementing