Impairment Loss

While we do not expect the stableswap’s asset will be less than its liability, once it happened it will result in trust crisis and even bank run. To cater for such scenario, if the system has become insolvent, the loss should be beared jointly by all liquidity providers.

Impairment loss IL is defined to be the shortfall of the system’s equilibrium coverage ratio r∗ from 1, and is chargeable upon liquidity provider withdraws (where the system is insolvent). Mathematically,

$$IL = \begin{cases} 0, & \text{if } r^* \geq 1 \\ 1-r^*, & \text{otherwise} \end{cases}$$