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# Guardrails & Impermanent Loss Mitigation

## Guardrails & LP Safeguards

Mechanics Goals
The goals can be generally defined as follows:
• Make the LPs whole (QTY): Hold sufficient quantities of the deployed assets in the system reserve
• Maintain or increase the POA (system reserve): Pull operational surpluses and system revenue into the POA
Overview
In simple terms, Tokemak will seek to deploy a maximum of its POA assets using the guardrails to determine the amount of LP assets it can deploy alongside (leverage) within the predetermined risk profile (100% relative price change in the above example). This leverage might be restricted during adverse market conditions.

### The Asset Stack & Impermanent Loss Mitigation Waterfall

For all examples in this document a mitigation for a relative change in the exchange rate of up to 100% between the two paired assets will be demonstrated.
If a certain threshold (as defined below) of net-withdrawals by the LPs of a particular reactor is reached, mitigation mechanics become necessary in order to make the LPs whole.
1. 1.
Make LPs whole
By drawing the asset in deficit from the POA.
2. 2.
Assets in Surplus / System Revenue
Draw system-wide asset surpluses and system revenue into the POA. This will cover a large portion of the negative asset flow. The amount of surpluses that can be pulled into the reserve also depends on the net-withdrawal requests.
3. 3.
TOKE staked TOKE that was staked to direct the asset (whether Pair Reactor or Token Reactor staked TOKE) are used to cure and pulled into the POA. There is a difference in how staked TOKE are being used depending on which side of the pool the deficit occurred (asset vs base asset).
4. 4.
Protocol Owned Assets In a last step, should the above steps not be sufficient to make users whole, the system will resort to:
• Using ETH and/or stable coins from the POA to make the LPs whole.
• Should not enough ETH or stable coins be available, highly liquid reserve assets are sold for ETH or stables on external venues.
This last step would be performed without regard to a net-negative effect on the POA. As previously mentioned, this should not occur under circumstances within the range defined by the guardrails. It will be initiated by the DAO multi-sig and executed using best practices in order to mitigate front running and mitigate other manipulations. This is highly unlikely and we don't anticipate this stage will ever be reached.

## Deployment Guardrails

### General Definition

Deployment guardrails are restrictions imposed on the protocol limiting the maximum amount of assets deployed per individual Token Reactor (asset pairs) and deployment cycle. The guardrails allow for managing market risk by ensuring that the mitigation mechanics are effective within predetermined market conditions.

### Defining and Setting Guardrail Parameters

In order to define and set appropriate parameters for the deployment guardrails the range of market conditions (exchange rates) under which the changes in quantity of the deployed assets are to be mitigated has to be defined and potential parameters have to be identified.
Initially the goal is to set parameters conservatively such that relative changes in exchange rates of up to 100% can be covered by the reserve. Below is an example of a fictitious asset paired with ETH and deployed to a 50:50 AMM pool under such conditions:
Table 1. Status of the pooled assets at the beginning
After a 100% price increase of ABC the status of the pool is as follows:
Table 2. Status of the pooled assets upon withdrawal
Examining the changes in QTY and associated notional values produces the following results:
Table 3. Changes in quantity and resulting loss in notional value
The following can be observed in a scenario of a 100% (doubling or halving of value of one of the assets) relative change in price:
1. 1.
A QTY-deficit of 29.3% in ABC will have to be covered by assets from the POA-ABC to make the LPs whole.
2. 2.
A net withdrawal of over 70.7% of ABC would be required before further mitigation mechanics would become necessary.
In conclusion it can be inferred that the protocol will be able to make LPs whole after a relative change in price of 100% as long as the LP assets deployed alongside the POA do not exceed 29.3%, as 29.3% of the initial qty will have to be covered.
It should also be noted that the amount of LP assets deployed alongside POA assets might be changed in the case of extreme market conditions.

### Guardrails Implementation

In accordance with the above logic the guardrails will be controlled via parameters that can be altered by changing variables, which will be adapted to match e.g. the above mentioned market conditions.
For XXX / YYY pool, deploy only the liquidity that obeys the following rules (use most restrictive):
1. 1.
Deploy only V-multiple in LP assets of the quantity (leverage) of XXX deployed from the POA. Deploy only Z-multiple in LP assets of the quantity (leverage) of YYY deployed from the POA.
Asset Stack and Reactor Health
The below graphic illustrates the asset stack at the beginning of the cycle, from which the reactor health (RH) and the health of Pair Reactors can be calculated using the quantities:

### ​$RH = \frac {Asset_{POA}+Asset_{LP}}{tAsset_{Deployed}}$​

According to a .3x POA multiplier the RH is 1.33 at beginning of cycles and can increase and decrease depending on the market price of the asset.
Additionally, the total collateral (TC) of the reactor can be calculated using the notional values, which includes the TOKE staked to the reactor:

The Asset Stack