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Delta Neutral LP
Aark Digital has introduced the first single-sided and delta-neutral LPs in a peer-to-pool derivatives DEX, designed to greatly enhance capital efficiency, collateral options, and liquidity pool size while providing users with an experience comparable to centralized exchanges. This innovative approach to liquidity provisioning provides increased flexibility and control, allowing LPs to earn delta-neutral APR while maintaining their token balance. When users deposit liquidity on Aark, they can rest assured that their assets remain in their native form. Our design allows users to devise various strategies and farm a wide range of assets according to their preferences. For example, if a user decides to hold ETH, BTC, and DOGE long term while still earning yield, they can select to deposit all 3 for liquidity. Users can compose any strategy they want using a wide selection of assets while protected from impermanent loss or conversion of their assets.
Aark LPs achieve delta neutrality through 4 components:
Aark Digital introduces funding fees instead of borrowing fees used by traditional derivatives DEXs. This reduces directional exposure and enhances LP stability by incentivizing funding-fee-seeking arbitragers to balance open interest (OI) at 50:50. Similar to the CEX model, whenever an asset trades at a premium or discount to the index price, funding fees force longs to pay shorts or vice versa to balance out OI. With Aark Digital’s funding fee model, the directional exposure of LPs is neutral, as funding fees are updated continuously to balance out OI. Since longs and shorts are direct counterparties to each other, the liquidity pool will only absorb the PnL of OI imbalances. An example would be 2% if the PnL of long-short OI is 51:49. Also, stability is further enhanced by introducing ‘continuous’ funding fees paid out in block intervals instead of the typical 1 or 8-hour interval of alternative DEXs.The funding fee amplifier and skewness cap further enhance delta neutrality by limiting LPs' directional exposure. In particular, the funding fee amplifier achieves this by adjusting funding rates for liquidity pool risk, whereas the skewness cap limits the skew of markets without limiting OI.
Similarly, LPs also earn from the standard trading fees and trader's losses. The crucial distinction is that the introduction of funding fees reduces the directional exposure of LPs so that they are not the sole counterparty to trades. Funding fees introduce a tangible incentive for other actors—such as market makers or arbitrageurs—to take the opposite side of a skewed market.
To summarize, LPs on Aark benefit from:
- 1.Single-sided liquidity; no impermanent loss from pegging assets to other tokens or conversion, such as with GMX's GLP or DYDX conversion to USDC.
- 2.Funding fees: ensure LPs remain delta-neutral.
- 3.Trading fees.
- 4.Trader's losses (when traders lose, losses are paid out to LPs).