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Perpetual Liquidity Pools
Automated market making for perpetual markets.
Perpetual liquidity pools, aka perp pools, are similar to spot liquidity pools as they are both used to provide liquidity to markets.
While spot pools provide liquidity to spot markets and require at least two tokens, perp pools provide liquidity to perpetual markets and only require one token, which is usually Carbon's $USD.
Liquidity providers deposit $USD to perp pools on Demex to add liquidity to perp markets, and receive $CPLT tokens (previously known as $CLP) in return.
$CPLT are yield-bearing tokens that signify your share of the provided liquidity in the perp pool. Each perp pool will have its own $CPLT token.
Perp pools use the $USD it receives to create resting bids and asks on the orderbook around the oracle price on perpetual markets that it is assigned to.
The perp pool has an automated market-making strategy that controls how much and how far away from the index price the bids and asks are placed, in order to control the slippage and spread for each market.
In terms of fee tiers, $CPLT has its own fee tier with 0% taker fee and 0.08% (8bps) maker rebate.
Watch this short video to see it in action:
$CPLT earns from trading APR, which comprises the following:
- High Maker Rebates: When a trade is executed using your liquidity, you earn maker rebates, and Demex has one of the highest maker rebates (8bps), rewarding you for adding liquidity to the market and promoting order book depth.
- Funding Rate: As part of the perpetual trading mechanism, funding rates are exchanged between traders. Liquidity providers also earn a share of these funding fees in the form of borrowing fees for lending their liquidity to the pool. Perp pools have a unique funding rate mechanism that gradually increases if the longs and shorts are imbalanced, by encouraging funding rate arbitrageurs to take the less popular trade, rebalancing the skew between longs and shorts. More info can be found here.
- Trader PnL: You will receive a portion of the losses generated by traders who open and close their trades in a loss when using the liquidity in the perp pool for their trades.
Suppose you deposit $1k into a Perp Pool that's linked to BTC-PERP and ETH-PERP with a max liquidity ratio of 1.0 for each. The max liquidity ratio indicates how much liquidity is provided to that market, with 1.0 being the maximum.
Upon your deposit, a $1k bid limit order and a $1k ask limit order will be placed by the perp pool near the Index price on the BTC-PERP market as well as the ETH-PERP market. Thus, your $1k liquidity contribution effectively generates $4,000 in order book liquidity.
The bid and ask prices are kept close to the Index price to provide traders with competitive rates. These prices are frequently updated to follow the Index price.
Now let's assume a trader goes long and fully utilizes the $1k of liquidity provided by the perp pool on BTC-PERP. Now the trader is $1k long BTC and the pool is $1k short BTC. Let's breakdown what happens first.
The trader is essentially borrowing your liquidity to go long. Also, the liquidity available on ETH-PERP will also be simultaneously removed as the pool only has $1k of liquidity ultimately, even if there's a total of $4k of liquidity on the orderbooks.
In terms of fees, the trader will incur taker fees based on his fee tier, while you earn maker rebates. Typically the taker fee starts at 0.15% while you earn 0.08% maker rebate, while the remaining 0.07% goes to the protocol, of which 60% goes to SWTH stakers based on SWTH tokenomics.
Note: Each perp market can have its own fee tiers.
Now, if BTC goes down, the trader's long position is down as well. Let's say the position is down 50% or $0.5k and the trader chooses to realize his loss, the trader can close his position against the pool by going short, which reduces his long position and the pool's short position.
The pool's short position would also be up $0.5k.
To protect liquidity providers, perp pools have a dynamic funding rate mechanism. The funding rate gradually increases when the liquidity utilization rate is high, allowing liquidity providers to earn more when there is a preference for the majority of traders go long or short.
Additionally, the high funding rate also encourages funding rate arbitrageurs to take the less popular trade, reducing the perp pool’s exposure back towards 0, helping the pool to be delta-neutral even during directional markets.