Mining (AMM Liquidity Mining)
Liquidity
Overview
Liquidity providers provide liquidity to Deri pools to mine yield paid in DERI tokens. The provided liquidity can be withdrawn at any time and solely through the address with which the liquidity has been added. Liquidity Providers cover the discrepancy of trading positions between long and short positions for each of the trading symbol of the specific trading pool they added liquidity to. So if the long positions of a trading symbol exceed the short positions, then the liquidity providers in this event take over the short side. In the opposite case, if the short positions of a trading symbol exceed the long positions, liquidity providers would take the long side, to cover the discrepancy of missing positions between the both. Covering the discrepancy opens up a potential market risk for liquidity providers, but also the potential to earn a share of the traders' losses.
So in general, it is essential to comprehend that liquidity providers are the counterparts of traders on Deri Protocol. When traders realize profits, they do so at the expense of liquidity provider's provided liquidity. When traders realize losses or are liquidated, liquidity providers realize profits at the expense of traders.
To mitigate the risk of losses for liquidity providers, those receive 20% of all transaction fees paid by traders belonging to the same pool, likewise liquidity providers receive remaining margins from liquidations, if a traders position is liquidated. In addition, they may also earn from the funding fees. With these potentially attractive compensations, we reduce the risk of losses for liquidity miners and facilitate the ability to offer liquidity on Deri Protocol to a degree to potentially even leading to a positive PnL, beside the always certain yield earned in DERI tokens.
Liquidity providers also earn additional yield from the money market protocol - interest and also the protocol's liquidity mining reward while providing liquidity (only v3 pools).
| - | Transaction fees | Funding Fee (Perpetual Futures) | Funding Fee (Everlasting Options) | yield/mining rewards (only v3) | Liquidation |
|---|---|---|---|---|---|
Liquidity Providers | Receiving (20%) | Receiving | Minority long side: Paying Minority short side: Receiving | Receiving | up to 1000$ 50%, over 1000$ >50% |
Trader | Paying | Minority side: Receiving Majority side: Paying | Long: Paying Short: Receiving | Receiving | N/A |
Specifically, there are two types of potential returns, one with market risk:
I. Yield of DERI token
The APY shown on each liquidity pool refers to this part of yield.
As a miner, you earn your DERI reward (APY), proportional to the dollar value and the time length (i.e. timed value) of your liquidity contribution.
DERI rewards is calculated and distributed per block based on LPs’ liquidity percentage in each pool. You can claim them by clicking on the DERI icon. Please note that you will need to pay transaction fees in order to claim your DERI reward tokens.
II. Base token Profit (with Market Risk)
As mentioned above the Liquidity provider's PnL, which reflects your profits and losses, is an interplay of various fees paid & received, possible liquidations, profits and losses of the counterpart.
Specifically, there are certain and uncertain profits you may earn as a liquidity provider. For this part of profits, your liquidity (base token, e.g. BUSD) is exposed to market risk since you act as counterpart to the trader's position. All of the following certain and uncertain profits are paid in the Base token currency. (e.g. BUSD)
Certain Profits:
20% of the transaction fees paid by traders flow into the liquidity pool and are shared between the liquidity providers. (This percentage is the result of DIP2).
Perpetual Futures Pools: The funding fee is always paid by Perpetual Futures traders on the majority side to minority side. And since the pool including its liquidity providers are always on the minority side, Liquidity providers receive funding fees. This fee amount is dynamic and adjusts to the net position (Total size of long position minus total size of short position held by traders).
When the trader is liquidated, the remaining margin is shared between the liquidators and the liquidity providers. Up to a certain amount (e.g. ~2000 USD), the remaining margin position is shared in half, whereby for larger margin positions, the LP's overall share increases, as the liquidators' profit is capped at a limit (e.g. ~1000 USD).
Additional yield from the money market protocol - interest and also the protocol's liquidity mining rewards. (only v3 pools)
Uncertain Profits:
An uncertain but possible, loss of a trader increases your LSV or Mining PnL.
Everlasting Options Pools: The funding fee is always paid by Long-positions to short positions. Unlike Perpetual Futures pools, if there are more short than long positions in the pool, liquidity providers cover the difference and switch to the long side. Since long always pays short, liquidity providers pay funding fees to the short traders. If long positions exceed short positions, liquidity providers take the short side and receive funding fees. This possible profit is in your Base token currency
Market Risk:
An uncertain but possible profit of a trader decreases your LSV or Mining PnL. To the extent that it can become negative. Nevertheless, the probability of market loss on Deri liquidity mining is much smaller than for e.g. that of Uniswap due to the protection of arbitrageurs. This uncertain, but possible loss is in your Base token currency
While liquidity providers are always on the minority side on perpetual futures pools (i.e. they earn funding fees), they can (but don't have to) be on the majority side on Everlasting Options pools (i.e. they pay funding fees), since Long always pay short. Therefore, if the liquidity providers take the long side, they pay funding fees to the short side. This possible loss is in your Base token currency
Minig PnL Settlement
When you market making in DERI, you are exposed to uncertain market risk and therefore incur a corresponding PnL, which will be settled based on the type of token you are lping and the result of profit/loss.
When you deposit a non-BUSD tokens (e.g. BTC) to provide liquidity and your mining pnl is positive, you choose to withdraw all your BTC, your mining pnl will be converted to BTC along with your liquidity. However, if you have other non-BUSD tokens that are lping at this time, your mining pnl will be transferred to your BUSD vault when you withdraw all your BTC.
When you deposit non-BUSD tokens (such as BTC) for market making, and the mining pnl is negative. When you choose to withdraw BTC, the smart contract will automatically sell some BTC to cover the loss, so the amount of BTC receive will be less than the initiated amount.
When you use BUSD to make market, regardless of the positive or negative mining pnl, it will be settled directly with your BUSD account.
Liquidity provider's profit (or loss) in base token is reflected in the change of Liquidity Share Value (LSV) or Mining PnL. You can calculate your base token total by multiplying the LSV with the Staked Balance, shown on the pool info overview.
Deposit Reward & Withdraw Penalty
With the DPMM mechanism, the net position borne by the liquidity pool pushes the Mark Price up or down by the net position size. Such deviation is inversely proportional to the pool‘s total liquidity. Therefore, adding liquidity would bring the Mark price closer to the Index price (for futures) or the theoretical price (for options and powers) and consequently cause an unrealized profit to the pool. Whereas removing liquidity would push the Mark price away from the Index price or the theoretical price and consequently cause an unrealized loss for the pool. In other words, such unrealized PnL would incur a minor reward for adding liquidity and a minor penalty for removing liquidity. (Please note these unrealized PnLs, i.e., the rewards and the losses, are generally insignificant.)
Per the DPMM, the reward will be distributed among all LPs, while the penalty will be borne by the removing LP alone. Since the total rewards and total penalties would cancel out, all the LPs as a while will not have any profit or loss due to this reason. However, those staking liquidity longer will share more profits and bear less loss from this mechanism than those staking shorter. So this is a mechanism to encourage LPs to stake longer rather than shorter.
Got questions about AMM Liquidity Mining on Deri Protocol? Check out our Mining FAQ
Is AMM Liquidity Mining on Deri pools risk-free?
No, it isn't. In general, it is essential to comprehend that liquidity providers are the counterparts of traders on Deri Protocol. When traders realize profits, they do so at the expense of liquidity provider's provided liquidity. When traders realize losses or are liquidated, liquidity providers realize profits at the expense of traders.
To mitigate the risk of losses for liquidity providers, those receive 20% of all transaction fees paid by traders belonging to the same pool, likewise liquidity providers receive remaining margins from liquidations, if a traders position is liquidated. In addition, they may also earn from the funding fees.
However, please note that such market risk is different from the impermanent loss of spot exchanges (e.g. Uniswap or Sushiswap). First of all, the fact it is called "risk", instead of "loss", indicates that the mining PnL (i.e Profit & Loss) result could be negative but also positive (which depends on several factors such as funding & transaction fees, exceeding traders' profits & realizing them, etc.). Secondly, the probability of a negative result (a loss) on Deri liquidity mining pools is much smaller than that of typical spot exchanges due to the protection by arbitrageurs, although a certain market risk remains. You might think of liquidity mining on Deri as investing in a low-risk fund with potentially very high profit, whereas that risk-free liquidity mining is like depositing your money into a bank saving account.
Please refer to our whitepaper for further details regarding the protection by the arbitrage mechanism.
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