How to Earn Yield from a Liquidity Pool

How to become a Liquidity Provider on DeVol.

What decisions do Liquidity Providers (LPs) have to make in order to earn yield?

LPs are able to provide collateral to support market making without needing to pick specific strikes or actively trade. LPs only need to decide which trading pair (e.g. BTC/USDC, ETH/USDTC) and option maturity ("duration") they want to provide liquidity for (e.g. 2 days, 7 days), and pick a pool accordingly.

On the LP Order Manager, LPs can see all pools supporting options trading on the platform. There may be more than one pool for a given trading pair and duration, each with its own option initialization schedules.

Pool performance:

LPs earn a return associated with the pool overall exposure as a result of buying or selling options as needed to meet tradersโ€™ needs, taking the opposite side of tradersโ€™ orders with respect to all strikes during the active trading period. When a new trade comes in, the AMM price impact function evaluates the expected change in liquidity and inventory risk after each trade and charges two separate price impacts:

(1) Mark price impact. This is the adjustment to price due to the impact of the trade on liquidity.

(2) Risk price impact. This is the adjustment to price due to the contribution of the trade to total inventory risk given all prior existing pool/LP positions.

The actual yield of a given pool cannot be predicted. It is a function of:

  • The poolโ€™s aggregate volatility exposure (itself dependent on what trades are needed to accommodate traders).

  • The difference between realized and implied volatility.

  • The performance of the underlier.

However, through the design of the price impact function (and particularly the risk impact), in the long run LPs are properly compensated for providing liquidity to DeVol.

Disclaimer: The yield for a given pool is an indication of cumulative past performance since the Pool Start, that is the date that the first option supported by the pool was initialized and traded. There is no guarantee of positive returns, and the pool can experience losses.

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