Leveraged LP

  1. 1.
    What is Leveraged LP
Leveraged LP design greatly enhances liquidity rewards and size of the liquidity pool. Leveraged LP can be understood as an LP version of perpetual contract as Leveraged LP. The following could be said about perpetual contracts:
  • Perpetual positions do not borrow capital unlike margin trades;
  • because there is no borrowing, there is no borrowing fee or interests; and
  • liquidation happens when positions cross the Maintenance Margin Ratio.
As such, the following can be said about Leveraged LP:
  • LP positions do not borrow capital from lenders;
  • there is no borrowing fee or interests; and
  • liquidation happens when positions cross the Maintenance Margin Ratio which are the exact same parameters as used by Aark perpetual contracts.
Traditional leveraged yield farming protocols which essentially borrowed from self-provided lending pools saw lending rates skyrocket at times of high demand, often seeing the cost take over the rewards of yield farming, experience leveraged impermanent loss, and often lead to liquidations. Thus, Aark Digital's Leveraged LP design removes such uncertainty factor caused due to uncontrollable cost changes. Bottom line, Leveraged LP is essentially like trading perpetuals except without paying funding fees.
Such leverage has two important impacts:
1-1. increased APR and trader PNL: The leverage feature increases the size of the user's deposited capital. As such, the LP amount is essentially bigger, for instance if a user deposited $100 and leveraged it by 5x, it has essentially the same effect as depositing $500. Thus, the user is subject to 5x more rewards or APR as compared to a position without leverage. Further, LPs will also be counterparty to 5 times more PNL of traders.
1-2. increased liquidity for protocol: Even with a smaller deposited capital, the leverage function increases the overall LP amount, providing a more liquid trading environment for traders. Thus, compared to a pool without any leverage, a fully leveraged 5x LP pool will create a 5 times more liquid environment for traders. This creates a positive cycle of enhancing trading experience for traders, increasing trading fee rewards for LPs, and again increase in LP amount.
Leveraged LP is Soulmate of Delta-neutral/Market-neutral LP Design
The design of Leveraged LP is suitable only together with Delta-neutral/Market-neutral LP designs. As the positive impacts of Leveraged LP's are clear in that LPs have higher profitability and while traders have a more liquid trading environment, it comes with the downside in which LPs are exposed to higher trader PNL and risk of liquidiation. Thus, it is evident that exposing the pool to minimum PNL is the way to stabilize the LPs from leveraged losses and liquidations.
As such, Aark's LP is designed to expose LPs to the minimum PNL through three mechanism:
  • skewness cap
  • streaming funding fees
  • insurance pool