Taiwanese team Hakka Finance launches options trading platform iGain: DeFi temporary loss IL solution

The AMM Automated Market Maker protocol has proven to be well-suited for DeFi in the market, but impermanent loss (IL) remains a major challenge for liquidity providers (LPs). IL has high volatility and is difficult to predict, potentially adding an additional 5% to 8% of losses in extreme market conditions. Taiwanese startup Hakka Finance has introduced a new product called iGain to allow LPs to hedge against these losses.

Taiwanese DeFi startup launched a new product iGain on the Binance Smart Chain (BSC) yesterday to address the impermanent loss (IL) issue faced by DeFi liquidity providers. iGain is an options trading platform that transforms IL risk into DeFi options products, enabling LPs to find counterparties to hedge IL risk.

On the iGain platform, there are Long tokens and Short tokens, representing long and short positions on IL. For example, with 10x leverage, 1 Long token can hedge $10 of IL position. If an LP holds a $10,000 IL position, they can purchase 1,000 Long tokens to hedge the risk.

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The first IL pool on iGain is BNB/BUSD, with a duration of sixty days and 10x leverage. Additionally, Hakka Finance has launched liquidity mining, offering 500,000 $HAKKA tokens as rewards for the liquidity pool.

Lucien Lee, CEO of Hakka Finance, stated:

iGain aims to marketize the risk of liquidity mining, allowing risks to be traded and transferred. In this process, we meet the needs of various participants in the financial market, such as hedging, arbitrage, discovering alpha, speculation, and price discovery.

The Logic of iGain Hedging

Hakka Finance officially backtested every day from last year 2020 to July 15th this year. If ETH/USD is invested in a 50/50 trading pool, it is found that the Impermanent Loss (IL) fluctuates greatly and unpredictably. In extreme market conditions, additional losses of 5% to 8% may occur regardless of price increase or decrease.

The following figure shows the expected profits in the current LP. Without iGain hedging, if the IL fluctuates too much, it can eat into profits. Additionally, although trading fee income and mining rewards may seem substantial, they require a long period of accumulation, whereas IL-induced losses are immediate.

For example, if an LP expects a 50% return in six months, but after several weeks, due to a drastic ETH price drop, they face significant IL. Without enough time to accumulate fee and mining rewards, the entire position suffers additional losses due to price volatility.

iGain, as an option platform targeting IL, provides a hedging tool that allows you to offset the volatility risk of IL with a fixed premium.

If an LP wants to hedge risk, they need to purchase Long tokens. Taking a ten-fold leverage as an example, if Xiao Ming holds LP tokens equivalent to $10,000, they need to buy 1,000 Long tokens. The total cost of the purchase is the premium, which is the cost required to hedge against IL fluctuations. After the purchase, regardless of how the price changes, compensation can be obtained at the expiration date based on the size of the temporary loss.

For instance, if Xiao Ming can purchase 1,000 Long tokens at an average price of 0.15 DAI, the total cost is 15 DAI, equivalent to paying a cost of 1.5% of the position size for insurance. As long as the IL does not exceed -10% at settlement, full compensation can be obtained based on the size of the IL.

At this point, the expected return for the LP becomes:

iGain is not just an IL risk hedge, it is a financial tool for achieving "fixed interest rates"

Although iGain initially addresses the IL solution, it can actually marketize any financial target as a DeFi tool.

Hakka Finance CEO Lucien Lee explains:

On the surface, iGain appears to be just an options platform for hedging liquidity mining IL risk, but in essence, iGain is a DeFi product that marketizes various financial targets through options, making a derivative and elusive financial concept marketable.

He stated that through "decentralized" and "derivative" financial products, assets can be provided with "more efficient" and "lower friction" circulation, allowing capital to flow to the right places. This is the true value of iGain and the Hakka Finance's spirit of spreading Hakka culture.

"Returning to iGain, financial concepts worth marketizing are not limited to liquidity mining risks in DeFi. Many targets can be captured using iGain mechanisms, such as fluctuating lending rates, which is one of our next focuses. Through iGain, we can create the effect of fixed lending rates with a small amount of capital on DeFi."