Risk Management

How the System Works

Liquidity providers essentially take the opposite side of all trader positions. When traders profit, they withdraw funds from the liquidity pool, resulting in losses for liquidity providers. Conversely, when traders lose, liquidity providers gain.

When a user provides liquidity to a pool, they receive LP tokens proportional to their contribution, representing their share of the pool. For instance, if a user contributes liquidity at a 1:1 ratio, they receive LP tokens reflecting that proportion.

LP token value fluctuates based on pool dynamics. Liquidity providers earn rewards from hourly borrow fees, liquidations, and trader losses, which increase the value of LP tokens. also when traders close positions at a profit, liquidity providers incur losses, reducing the value of LP tokens.

In the case where traders are on profit but haven't closed their position (this is an unrealized loss for the LPers) and for example LP token value still reflects the initial 1:1 conversion rate, a liquidity provider can decide to withdraw his own share of liquidity provided at the conversion rate of 1:!, unaffected by the unrealize losses.

However, if traders close their positions in profit (Realized loss for LPers) causing the LP token value to decrease, the conversion rate adjusts accordingly. Any liquidity provider withdrawing at this point will realize the associated loss based on the updated conversion rate.

Long-Term Profitability

Historical data from other perpetual trading platforms shows that traders collectively lose money over extended periods. While there may be short-term periods where traders are profitable, liquidity providers consistently come out ahead over the long term due to this fundamental market dynamic.

Fee Structure and Incentives

Hourly Borrow Fee

We implement an hourly borrow fee that functions similarly to funding rates on other platforms. Key features include:

• Dynamic rates: The fee adjusts based on the ratio of long vs. short positions, helping maintain market balance

• Position prevention: This mechanism discourages traders from all taking the same side of a trade

• Full position coverage: Unlike some platforms, our fee applies to the entire position size, not just the leveraged portion

• Anti-coasting measure: Prevents traders from using minimal leverage to avoid fees while waiting for profitable opportunities

Balanced Incentive System

The fee structure dynamically balances the market by:

• Increasing costs for the overrepresented side (long or short)

• Making the underrepresented side more attractive

• Ensuring continuous revenue flow to liquidity providers

Risk Considerations

While the system is designed to favor liquidity providers over time, short-term volatility can occur. During periods of strong directional market movements, traders may temporarily profit at the expense of the liquidity pool. If a user provided LP today, and a trader closes a position in profit today, but that position was opened yesterday when this user haven’t provided LP yet, this user will incur that loss too.