How to Earn Yield from a Liquidity Pool
How to become a Liquidity Provider on DeVol.
What decisions do Liquidity Providers have to make in order to earn yield?
Liquidity Providers are able to provide collateral to support market making without needing to pick specific strikes to be backed by deposits, or participate in active options trading. Liquidity Providers only need to decide which trading pair (e.g. BTC/USDT, ETH/USDT) and option maturity ("duration") they want to provide liquidity for (e.g. 2 days, 7 days), and choose a specific Branch (i.e. initialization schedule) to support.
What are Branches?
On the LP Order Manager, Liquidity Providers can see all Branches supporting options trading on the platform.
Branch ID: Each Branch is identified by a number (Branch ID) and has a unique start date, trading pair, and pool duration. A Branch is a chain of options (across all strikes) for the same trading pair and duration (time to maturity), that are scheduled to be initialized with periodic frequency and a specific initialization schedule.
At any point in time, in a given Branch there is only at most one option (all strikes) being actively traded, and one Liquidity Pool that supports this expiration period. After option expiration and settlement, funds in the Liquidity Pool are automatically rolled over into a new Liquidity Pool to support the next option initialized in the Branch. Note that there can be different branches assigned to the same trading pair (e.g. BTC/USDT) and duration (e.g. 2 days), because of the differences in the initialization schedules (e.g. options could be activated January 1,3,5 etc. in one branch and January 2,4,6 etc. in another.).
Start: This is the date when trading began for the first option/Liquidity Pool in the Branch.
Instrument: Trading pair supported by the Branch/Liquidity Pool. A trading pair is the combination of the underlier and base currency for settlement (e.g. BTC/USDT).
Status: Displays whether an option is actively being traded in the Branch, or whether we are in the window in between two option trading periods (i.e. after option expiration but before a new option is initialized) during which no penalty is applied if funds are withdrawn. Typically, this window is between 8:00am UTC and 9:00am UTC.
Duration: Time to maturity for all options initialized in a Branch.
Price: Price of each pool token.
Yield: Cumulative yield of the Liquidity Pool since the start of the Branch.
![Figure [8] Branches](https://1053614631-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FHIot5XPa1CSCgtTRRR00%2Fuploads%2FjwI8nXzj26EKgobDDZrl%2FBranches.png?alt=media&token=65936e71-0147-4897-9e88-9b14b8d8ccd5)
Figure [8]. Branches
Pool performance has two components:
- 1.The return associated with the pool overall exposure as a result of buying or selling options as needed to meet traders’ needs, taking the opposite side of traders’ orders with respect to all strikes during the active trading period. The actual yield that the pool will earn is a function of:
- The pool’s aggregate volatility exposure (itself dependent on traders’ activity).
- The difference between realized and implied volatility.
- The performance of the underlier.
- 2.Additionally, the Liquidity Pool also receives a percentage of trading fees as compensation for providing liquidity to support option trading. This percentage is set to [50%]. However, during a promotional period after launch, to incentivize liquidity provision on DeVol it will be increased to [75%]. Trading fees earned by Liquidity Providers depend on overall trading levels on the exchange.
Disclaimer: The Yield for a given Branch is an indication of cumulative past performance since the start date for the Branch (i.e. for the first option trading period). There is no guarantee of positive returns, and the pool can experience losses.
Last modified 22d ago