What are Liquidity Pools
Looking to understand Liquidity Pools? Learn about the benefits of providing liquidity, and how they contribute to the growth of the DeFi ecosystem.
Last updated
Looking to understand Liquidity Pools? Learn about the benefits of providing liquidity, and how they contribute to the growth of the DeFi ecosystem.
Last updated
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What are liquidity pools?
Liquidity for option trading on DeVol is provided by liquidity pools, that is crowdsourced pools of cryptocurrencies or tokens that are locked in the smart contract. A liquidity pool contains base currency tokens (e.g. USDC) and is set up to facilitate trades for options for a given trading pair (e.g. BTC/USDC) and option duration (i.e. time to expiration plus one-hour non-trading window).
Each pool is identified by a number (Pool ID) and has a unique start date, trading pair, and option duration. The pool will support a chain of options (across all strikes) that are scheduled to be initialized with periodic frequency and a specific initialization schedule.
At any point in time, a pool supports only one actively traded expiration (all strikes) at a time. After option expiration and settlement, unless withdrawn by Liquidity Providers, funds in the pool stay to support the next expiration, i.e. all strikes for the next option being initialized.
What are the defining features of a liquidity pool?
Each liquidity pool has the following defining features:
Pool ID | Unique identifier for a Pool. |
Instrument | Trading pair supported by the pool. A trading pair is a given underlier (e.g. BTC) and base currency for settlement (e.g. USDC). |
Pool Status | Active or Inactive. Active means a given option for a specific expiration is actively being traded. Inactive means the one-hour window after settlement and before the activation of the next expiration during which there is no trading and there are no restrictions when funds are withdrawn. Typically, this window is between 8:00am UTC and 9:00am UTC. |
Pool Start | The date that the first option supported by the pool was initialized. |
Next Expiration | The next option expiration supported by the pool. |
Duration | Time to maturity (length) for all options initialized and supported by the pool -- plus a one hour non-trading window. |
Total Funds | Total funds in the pool. |
Price | Price of each pool token. |
Yield (%) | Cumulative yield of the liquidity pool since Pool Start. |
Why is it possible to have multiple pools with the same trading pair and duration?
Note that there can be different Pools assigned to the same trading pair (e.g. BTC/USDT) and duration (e.g. 2 days), because of the differences in the initialization schedules. For example, options could be activated January 1,3,5 etc. in one Pool and January 2,4,6 etc. in another.
Liquidity pools during trading and at settlement
During trading, the pool can buy from or sell options to traders, taking whatever exposure (short or long volatility) is required to make a market. The pool always maintains sufficient collateral for settlement across the entire range of strikes in a given expiration, with funds in the pool designed as collateral for all possible values of the underlier in its expected range. This range covers expected outcomes across the distribution (99.9%) of the final price of the underlier at expiration, excluding extreme tails.
