Providing Liquidity
Unstoppable Margin Trading DEX offers single-sided liquidity provision (LPing), delivering Real Yield to LPs without impermanent loss.
Mechanism
Traders borrow from the liquidity pools to open leveraged orders with the assets provided by LPs' funds. LPs are insulated from traders' profits or losses, as trades are offset against the global market with 1:1 backing, creating a risk-free environment for LPs to benefit from.
Fund Usage: When a trader places a limit or market order, the Margin Engine borrows the required funds from the liquidity pool, based on the trader's collateral and chosen leverage.
Spot Market Execution: These borrowed funds are then used to execute the trader's order in the spot market, effectively backing the trade with real assets.
Return of Funds: After the trade, borrowed funds along with any accrued borrow fees are returned to the liquidity pool, maintaining the pool's integrity and liquidity.
Earning Borrow Rate: Liquidity providers earn returns through the borrowing rate paid by traders. These fees are calculated based on the utilization rate of the pool on a block-by-block basis, ensuring a fair compensation system for the provision of liquidity.
This framework allows liquidity providers to generate earnings from their assets, contributing to a balanced trading ecosystem where both traders and providers benefit from the market activities.
Neutrality
Liquidity providers (LPs) maintain a unique position of neutrality, largely due to the non-counterparty nature of their role in trades. This neutrality stems from several factors:
Independent of Trader's Performance: LPs' returns are not linked to the profitability or losses of traders. This distinct separation ensures that LPs' earnings are based solely on the lending rates and not on trading outcomes.
Non-Counterparty Role: Unlike traditional trading setups where LPs might act as the counterparty to trades, they solely provide liquidity on Unstoppable. Their funds are used for executing trades in the spot market, but they do not directly engage in trading against the users.
Consistent Yield Mechanism: LPs earn from the borrow fees paid by traders, irrespective of market movements and individual trader strategies.
This design of liquidity provision promotes a balanced ecosystem where LPs can contribute to the platform's liquidity without the risk of being adversely affected by the trading performance of individual traders.
Real Yield
The RealYield for liquidity providers (LPs) on Unstoppable originates from the borrow rate paid by margin traders over time. These fees are incurred when traders borrow tokens from LPs to open leveraged positions.
The yield is dynamic and correlates with the utilization rate of the total liquidity in the pool.
As the demand for borrowing increases, so does the interest rate, offering LPs higher returns for their provided liquidity.
This interest rate is adjusted on a block-by-block basis to maintain a fair balance between supply and demand.
Example: A trader wants to long $ETH and borrows $USDC from LPs, the borrow rate paid by the trader is directly distributed to the LPs as Real Yield in the form of the borrowed asset, in this case, $USDC.
Base and Safety Module Pools
When contributing assets to the liquidity pool, providers have the option to do this via the Base Pools or the Safety Module Pools.
| Pool Type | |
|---|---|
Base LP | The Base Pools offer liquidity providers to contribute their assets while ensuring their assets are last in line to cover a shortfall in the hypothetical case of an asset loss. |
Safety Module LP | Safety Module Pools offer liquidity providers a bonus on their yield; however, in the hypothetical case of a shortfall, these positions carry the risk first. |
Risks in Liquidity Provision
Asset Loss
The primary risk for LPs is asset loss due to a failure in the liquidation system. To mitigate this, Unstoppable has implemented a multi-layered, redundant monitoring and liquidation system.
In the rare event of a liquidation failure, the system's smart contract halts new trade openings to minimize risk, while still allowing trade closures, fund withdrawals, and LP position adjustments. Additionally, the safety module mechanism protects LPs by assuming first-loss risk.
Withdrawal Limitations
LPs may sometimes face constraints in withdrawing their full liquidity at once. This is due to the system's design, where only unutilized liquidity is available for withdrawal. For instance, if a liquidity pool is fully utilized, withdrawals are temporarily restricted. To avoid such scenarios, the platform adjusts borrow rates based on utilization, incentivizing new liquidity deposits and reducing utilization, thus freeing up assets for withdrawal.
Available Liquidity Pools
| Token Contract ID | Date Added | |
|---|---|---|
wETH* | Launch Pool | |
USDC | Launch Pool | |
wBTC | Launch Pool |
*LPs can use WETH or ETH for deposits and withdrawals.
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