# ILInsurance

> Pays liquidity providers back for divergence loss, out of a fund the pool's own trading fills.

A production Uniswap v4 hook. Source: https://github.com/nirholas/il-insurance. Part of the HookForge catalogue: https://hookforge.pages.dev

## How it works
Impermanent loss is the reason most people who try providing liquidity once do not do it twice. It is also badly named: there is nothing impermanent about it once you withdraw, and the number is not small. A provider who deposits into a pair that then moves has less than they would have had holding, and the fees they earned may or may not have covered it. Nobody tells them which until they leave. The existing answers all come from outside the pool. Bancor underwrote it from a treasury and stopped when the treasury could not take it. Options-based cover needs an options market for the pair. Both are somebody else's balance sheet promising to make a provider whole. This makes the pool underwrite itself. A slice of every swap goes into a fund, and when a provider withdraws, the hook compares what their position is worth against what the same deposit would have been worth held, and pays the difference from the fund up to a cap. Traders pay for the cover through a slightly worse fee, which is the correct party: the cover is what keeps liquidity in the pool they are trading against. The comparison is measured rather than modelled. At deposit the hook records what actually went in; at withdrawal it records what actually came out and values both at the current price. There is no closed-form IL formula here, because the formula assumes a constant-product position held across a single price move, and a v4 position is a range that may have been crossed repeatedly. What went in and what came out are facts, and the difference between them at one price is the loss. Three bounds keep this solvent, and none of them is a promise. A claim never exceeds `coverageBps` of the loss. A claim never exceeds what the fund holds, so the fund cannot go negative and there is no lender of last resort. And cover vests: a position withdrawn before `fullCoverAfter` is covered pro rata to how long it stayed, because insuring a position that arrives, watches one candle and leaves is not insurance, it is a free option on the fund.

## Prior art
Bancor v2.1 and v3 underwrote impermanent loss from protocol reserves and suspended it when they could not. Thorchain does the same with a vesting schedule this borrows from. Options-based cover exists where an options market for the pair does. Funding the cover from the pool's own trading flow, inside the pool, with a fund that can only pay what it holds, is the contribution here.

## Where it does not help
The fund is finite and claims are paid first-come. A pool that suffers a large correlated move after a quiet period will pay early withdrawers in full and later ones partially, which is the honest behaviour of a fund rather than a defect, but it is not the guarantee the word insurance implies. Cover is also valued in currency1 terms at the moment of withdrawal, so a provider withdrawing into a spike is measured against that spike.

## Facts
Slug: il-insurance
Contract: ILInsuranceHook
Callbacks: afterSwapReturnsDelta, afterSwap, afterRemoveLiquidity, afterAddLiquidity, afterInitialize
Parameters: none
Dynamic fee required: no

## Caveats
- Unaudited.
- A deployment with status "deterministic" is a mined CREATE2 address with no code at it yet. Never present one as live.