Leveraging Your AMM LP Tokens with Impermax

Chaz Schmidt
Jul 14, 2021
|5 minutes read

Being a liquidity provider in DeFi has typically been associated with opportunity costs and risks, particularly the always dreaded risk of impermanent loss. As a liquidity provider, it is important to familiarize yourself with the concept of impermanent loss and determining when the risk to reward ratio is right. But the truth is you have options aside from accepting impermanent loss as an inevitability, you could explore what’s possible with Impermax

Impermax set out to build what they refer to as the “missing piece of the AMM puzzle,” a protocol which allows users to maximize their AMM liquidity pool (LP) tokens. With Impermax, anyone can create a lending market for Uniswap (and soon to be other) AMM LP pairs. Liquidity providers can utilize their LP tokens as collateral to borrow tokens or leverage/multiply their AMM LP positions. Impermax allows users to put LP tokens to work which were once idle leading to more complex strategies and potentially ecosystem growth spurred by increased productivity.

Maximize the productivity of your AMM LP tokens

As previously mentioned, Impermax is a lending market designed for liquidity pool tokens of Uniswap and other AMMs. Let’s examine how this works behind the scenes. As a borrower, you must first deposit your LP tokens to use as collateral before being able to borrow or leverage. Impermax takes the LP tokens provided as collateral and allows users to borrow the underlying tokens in the LP pair. Interestingly, lenders can choose to lend one or both of the tokens in a LP pair to earn interest without any exposure to impermanent loss. Impermax refers to this as lndirect Liquidity Providing because lenders are basically earning a percentage of the trading fees that borrowers earn but without any impermanent loss.

It’s important to note that lending pools are isolated to each LP token pair and loans are 100% backed by the tokens inside the LP token pair held as collateral. The Time-Weighted Average Price or TWAP provided by Uniswap is used to calculate the liquidation prices of loans to ensure loans remain 100% collateralized. This is kind of cool because it enables Impermax users to permissionlessly add new Uniswap LP tokens and start a lending market for any LP token pair. 

Borrowers can choose to borrow either token in the pair individually for a unique strategy or simply borrow both to obtain leverage for their desired LP position. Impermax provides an easy to use interface which simplifies the process of leveraging LP tokens up to 10x to a single transaction. Impermax has a liquidity mining program which rewards users with IMX tokens for borrowing select token pairs. Since your rewards are based off of borrowing, you can actually multiply your liquidity mining rewards by leveraging select token pairs.

Use caution when operating power tools

As with all things in DeFi, nothing is without risk. We’ll be discussing some here but as always we encourage you to do your own research. Luckily, Impermax has a very nice risks section to aid you in your due diligence. Like most lending markets in DeFi, it’s possible that you may temporarily be unable to withdraw tokens as a lender if the lending pool has insufficient liquidity like in the event of a “bank run.” Although it should be noted that the dynamic interest rates are designed to alleviate these issues eventually. And of course, if you borrow or leverage, you face the potential risk of liquidation if you don’t meet collateral requirements.

You should also be aware that the permissionless nature of Impermax lending pools is a double-edged sword that carries unique risks. Since anyone can add a new AMM LP token pair and create a lending market, anyone can add new pairs even if they have low liquidity or are potentially malicious. Luckily, these risks are isolated to individual AMM LP token pairs. 

Remember, Impermax relies on Time Weighted Average Prices from the AMM. This means that if a pair is inactive for a long period of time, the price of the oracle may differ substantially from the market price. Additionally, an inactive pair may not attract enough liquidators to insure loans are liquidated in time which can result in a possible loss for lenders. 

Closing thoughts

You can never quite tell which direction the DeFi community will run with an idea but the writing is on the wall that liquidity providers want more out of their LP tokens. Impermax has designed their product to cater to the needs of these liquidity providers in a permissionless way similar to the AMMs themselves. This is enabled by Impermax’s practical and prudent decision to isolate risk to individual lending pools. Builders don’t have to ask for permission to whitelist their project’s AMM LP pair and can even permissionlessly incorporate Impermax lending pools at a protocol level.

Whether you’re a borrower looking to leverage your LP tokens or a lender looking to earn some extra yield from indirect liquidity proving, you should explore Impermax available lending pools today. If you’re unsure or just want to take a test drive, you can test Impermax’s application at no cost on Ropsten testnet with zero risks. Don’t forget to follow Impermax on Twitter or join the community (Discord and Telegram) to stay informed on the latest updates.

Disclosure: This post is part of our paid promotional DeFi Pulse Partner Program; We’ve partnered with Impermax to help educate and inform the community about its permissionless lending markets. As always, we’re committed to providing the entire community with quality, objective information, and any opinions we express are our own.