How Do Decentralized Insurance Protocols for Impermanent Loss Work?

Decentralized insurance protocols for impermanent loss typically operate by having users pay a premium to cover their liquidity positions. These premiums are pooled into a reserve fund.

If a liquidity provider experiences impermanent loss that exceeds a certain threshold, they can file a claim against the protocol. The protocol's smart contracts then verify the loss using price oracles and pay out the claim from the reserve fund.

The coverage terms, premiums, and payout calculations are all governed by the protocol's code and community-driven governance.