A short write-up on the risks and rewards that come with providing liquidity
Welcome yield hunters and traders alike!🧑🌾
This medium article will cover all the risks and benefits of being a liquidity provider for UniDex’s leverage platform pools. At the time of writing, we have crossed over $500,000 in TVL 🎉and this number is climbing each day. First, let us describe what pooling is and why someone would do it.
Make sure to read until the bottom!
What is an LP here?
Anyone staking USDC or FTM in our pools are considered a liquidity provider. By providing LP you become the counterparty to traders on the platform. So what does this mean in practice?
By providing LP anytime someone loses a trade on the platform, LPs earn that entire loss. Likewise, the pool is subtracted balance when traders are in profit.
- If person “A” closes a trade in 50 FTM profit and the TVL of the pool is 100,000 FTM, the trade will subtract 50 FTM from the pool and pay trader “A”.
- If person “B” loses 50 FTM on a trade then the pool gains 50 FTM for a new balance of 100,050. This now means that people providing liquidity are now able to withdraw a higher share than they previously deposited.
If traders are month to month consistent in net profit or a large sum in profit, then the pool balance could experience a loss. This is to highlight LPing is not risk-free. It would be best if you treated being an LP as being in a trade that has its benefits.
Naturally, the reverse is true where traders can consistently be at a considerable loss during large movements or market activity. This can cause an extremely profitable period for those in the pool.
The good stuff
Currently our pools look like this currently…
We launched 5 days ago and assuming the same trade patters occur for a year. Poolers are currently stand to make an APY of 372% for FTM.
This is because currently traders have net lost 12,729 FTM on their trades which comes after you add up the total negative and positive PnL ( profit and loss ) of all closed positions. Assuming this occurs for 365 days, then the pool size should increase by a rate of 372.63% APY. This makes it a highly attractive single stake pool for USDC or FTM.
Q: What is traders just always win? is that not a big risk for poolers?
A: Yes, this is what LPs are trading against after all. You are taking a position against all trades on the platform and thus experience a loss on their profits. However, studies show that nearly 95% of traders lose money on average for their trades. Further investigations by the SEC show that 70% of traders lose 100% of their portfolio within the year, too (source and studies linked).
Q: Do these pool trade against a single pair?
A: No, a single pool is a counterparty for all trading pairs on the platform. This makes it not only more efficient for traders but also makes it stay more in line with the average win-loss ratio of the market norm. This way, one pool isn’t more profitable than the other 20–30, and liquidity is shifting around too much.
Q: What protections do LP’s have?
A: No new trades can be opened once the pool reaches max utilization. This is to help keep the pool healthy during onesided markets and keeps traders in check. Existing positions have interest thats paid to pools directly so that there is a funding rate for all positions feeding the pool.
Pooling can be profitable but does come with its risks. Typically these risks are mininal when looking at the yearly average but the rule for only using what you can afford to lose goes a long way.
Good luck trading and let us know if you have any questions in our social channels!
UniDex Quick Links
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Twitter — https://twitter.com/UniDexFinance
Telegram group — https://t.me/unidexfinance
Telegram ann channel — https://t.me/unidexapp
Leverage Terminal — https://www.leverage.unidex.exchange/
Business inquiries — firstname.lastname@example.org