What Is the Concept of “Impermanent Loss Insurance” and How Does It Function as a Hedging Tool?

Impermanent loss insurance is a financial product, often offered by decentralized insurance protocols, that acts as a direct hedge against IL. A liquidity provider pays a premium to purchase a policy that covers a specific liquidity position for a set period.

If, at the end of the period, the provider has incurred impermanent loss, they can file a claim and receive a payout from the insurance protocol, similar to a traditional insurance policy. This transforms the unpredictable risk of IL into a fixed, predictable cost (the premium).