Earnings
Summary
When depositing liquidity to perp pools, you receive LP tokens (DPLT) that represent the share of your liquidity in the perp pool. They accrue value natively through several ways:
Trader's Losses: Traders who realized losses when trading against the perp pool
Borrow Fees: Traders pay funding fees, which are comparable to interest rates.
Maker Rebates: Traders act as market makers and in return receive a rebate for providing liquidity to be taken by traders.
Deposit/Redemption Fees: LPs who withdraw pay fees to remaining LPs.
As the perpetual pool attracts and accrues the various fees above, the value of each DPLT 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.
Remember to check if your pool has additional incentives when depositing!
Details
The liquidity pool (and therefore the DPLT) earns (or loses) 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 that take perpetual pool quotes have a negative PnL, DPLT token holders are in a profitable position. Conversely, when these traders have a positive PnL, DPLT 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 incentivize 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 receive a portion of the taker's trading fee as a maker rebate (via negative maker fees).
Deposit/Redemption Fees: The perpetual pool module may enable fees for minting and redemption of DPLT tokens. The fees are retained by the perpetual pool, such that all prior / remaining holders of DPLT 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 DPLT such that it is a value-accruing token that appreciates over time (unless traders achieve a net gain).
DPLT Value
The value of the DPLT token is determined by the quantity of USD and LP tokens present in the perpetual liquidity pool at any given moment, where:
The amount of DPLT minted or redeemed does not directly impact the value of DPLT. However, it does affect the rate at which the price of DPLT fluctuates.
Example
Consider the scenario where you contributed 1000 USD into the perpetual pool to mint 1000 DPLT tokens at the price of $1 each. As more USD is supplied to the perpetual pool over time, the price of the DPLT may increase to $1.50 per token. If you decide to withdraw your liquidity and redeem your 1000 DPLT tokens at this point, their value would be 1500 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 contract.
Market Risk: Should 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 token will be directly impacted.
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