What Are the Primary Hedging Strategies Used by Liquidity Providers to Mitigate Impermanent Loss?

Liquidity providers primarily use three strategies to hedge against impermanent loss. The first is providing liquidity for stablecoin pairs or highly correlated assets, which minimizes price divergence.

The second involves using financial derivatives, such as buying put options on the more volatile asset to protect against downside price movements. The third strategy is dynamic rebalancing, where the provider actively manages their position to maintain a desired asset ratio, though this can be complex and costly.

Some also use delta-neutral strategies, shorting the volatile asset to offset potential losses.