Earnings
Summary
When depositing liquidity to perp pools, you receive LP tokens that represent the share of your liquidity in the perp pool. They accrue value natively through several ways:
Maker Rebates
Traders act as market makers and, in return, receive a rebate for providing liquidity to the order book.
Borrow Fees
Traders pay funding fees, which are comparable to interest rates.
Trader's Losses
Traders who realized losses when trading against the perp pool.
Deposit/Withdrawal Fees
LPs who withdraw pay fees to the remaining LPs.
As the perpetual pool attracts and accrues the various fees above, the value of each LP token increases. As value accrues directly to the pool, earnings are realized by having more USD redeemable per LP token.
Additional Incentives
External rewards may also be given to users who stake their perp pool tokens. By staking, you earn additional incentives to enhance your yield from your liquidity provision on top of the regular fees that you are earning.
Details
The liquidity pool and liquidity providers earn (or lose) from:
Traders
By acting as the counterparty to traders, the perpetual pool earns whenever its net position is in the same direction as market movements. This implies that whenever traders who take perpetual pool quotes have a negative PnL, LP token holders are in a profitable position. Conversely, when these traders have a positive PnL, LP token holders will have a negative PnL.
Borrow fees
Traders who take quotes from the perpetual pool are essentially borrowing from liquidity providers and therefore pay borrow fees. This borrow fee is charged as part of the perpetual funding rate and will grow over time for as long as the perpetual pool holds a position. This encourages the perpetual pool to be delta-neutral and will incentivise arbitrageurs to take the opposite side of the trade, essentially closing off the perpetual pool's position.
Maker Rebates
The perpetual pool module is given the highest tier of fees. Because the perpetual pool always acts as a market maker, it also receives a portion of the taker's trading fee as a maker rebate (via negative maker fees).
Deposit/Withdrawal Fees
The perpetual pool module may enable fees for the minting and redemption of LP tokens. The fees are retained by the perpetual pool, such that all prior / remaining holders of LP tokens gain these fees pro rata.
The borrow fees and maker rebates are typically sufficient to counteract any losses incurred by the vault's position.
These rewards are auto-compounded into the LP Tokens, such that they are value-accruing tokens that appreciate over time (unless traders achieve a net gain).
LP Value
The value of the LP token is determined by the quantity of USD and LP tokens present in the perpetual liquidity pool at any given moment, where:
The number of LP tokens minted or redeemed does not directly impact the value. However, it does affect the rate at which the price fluctuates.
Example
Consider the scenario where you contributed 1,000 USD into the perpetual pool to mint 1,000 LP tokens at the price of $1 each. As more USD is supplied to the perpetual pool over time, the LP tokens' value may increase to $1.50 per token. If you decide to withdraw your liquidity and redeem your 1,000 LP tokens at this point, their value would be 1,500 USD, indicating a 50% profit on your initial investment.
Risks
There are risks involved when you participate in perpetual pools.
Smart Contract Risk
There will always be certain inherent risks associated with any smart contracts.
Market Risk
If traders win (positive PnL), those profits will be paid to them out of the perpetual liquidity pool.
Depegging Risk
In the unlikely scenario that USDC loses its peg, the LP tokens will be directly impacted.
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