Liquidity providers supply assets to one unified liquidity pool which serves as the market-making fund for traders. Providing liquidity can be considered as an investment into a type of index fund that holds a mix of major assets (BTCB, BNB, ETH) and stablecoins (USDC, USDT) and earns yields from multiple sources, which will be listed below.
In addition to earning token incentives for bootstrapping the pool, liquidity providers will also earn organic yields from the following sources:
- Position opening/closing fees: paid every time traders open, close, or make adjustments to their perp positions.
- Borrowing fees: accrue hourly from positions based on the utilization of the pool (similar to Alpaca’s lending pools).
- Swap fees: paid every time users swap on our exchange.
- Liquidity pool deposit/withdrawal fees: paid every time deposits/withdrawals are made from the LP pool.
- Counter-exposure profits: Liquidity providers in the pool act as market makers with counter-exposure to the aggregate perp positions, which can be considered to provide additional positive expected value. This has shown to be the case historically. Market makers providing liquidity to traders have consistently profited from the aggregate counter-exposure in most markets over the long term, including perp exchanges. So the counter-exposure is an additional earning layer on top of the index-fund-like exposure.
- Flash loan fees: Assets in the liquidity pool will be made available for flash loans, which will provide an additional source of revenue to LPs.
Please note that providing a flash loans service like this will not create a risk of flash loan exploits in any of Alpaca’s products, because the “provision” and the “acceptance” of flash loans are two different things. Alpaca does not accept flash loans. As for provision, flash loans are already provided by multiple protocols on BNB Chain such as PancakeSwap.
1️. MEV bots/oracle price front-running prevention
- With any transaction that utilizes a public oracle price, there is a risk of MEV bots front-running the transaction. As a consequence, front-running has generated significant losses in other on-chain exchanges. In the case of Alpaca’s Perpetual Futures Exchange though, we have designed a way to prevent this.
- We will use Chainlink Oracle as a reference price. This means the price that users see on their UI and all calculations will be pulled from Chainlink. However, when users try to execute a transaction requiring the Oracle price (open, close, deposit LP, etc.), we will always update the price from our internal feed first as part of the transaction, preventing any front-running. Our price feed will be taken from a combination of large reference exchanges such as Binance, Coinbase, etc.
- We will set a small tolerance (e.g., 0.05%) between our price feed vs. Chainlink that will revert the tx if our feed falls outside the allowed range.
- This method will safeguard against LP exploits and is similar to how we perform the reinvest function on Alpaca’s LYF prior to a new position being opened on a pool, in order to prevent similar exploits on farmers.
2️. Additional yield from Alpaca’s lending vaults
- A portion of unutilized assets in the LP pool will be deployed into the Alpaca lending vaults, generating further yields for LPs, while also making more assets available for LYF borrowing.
3️. Safeguard against one-sided exposure
- During a period of strong market sentiment, there could be outsized demand for long or short, leaving LPs with a large net exposure on one side.
- While the high borrowing interest that accompanies periods of high utilization will disincentivize new positions from being opened and encourage current positions to be closed, it doesn’t guarantee offsetting a long/short skew on open interest, nor is high utilization necessary for a skew to exist. Thus, to alleviate this issue, our Perpetual Futures Exchange will also have a Funding Rate mechanism.
- On CEXs, the Funding Rate is based on the difference between Perp’s price and the spot price of the underlying asset. On our Exchange, the Funding Rate will be based on the difference between long and short OI. This also means that traders can earn from the Funding Rate if they take the opposite side to the long/short skew, and the mechanism’s goal is to incentivize new positions such that the counter-exposure on the LP remains close to net-neutral.
The Fees for LP deposits and withdrawals will have two components
Total Fees = FixedFee + TaxFee
where , FixedFee = 0.3%
and TaxFee ranges from -0.3% — 0.5%
This means, Total Fees can range from 0% — 0.8%
TaxFee is determined by how the deposit / withdrawal will move the pool closer / further away from the target composition. For a more detailed formula on how tax is calculated, please visit our Calculator.