Supercharged LPs: Aark Digital’s Delta Neutral LP
Aark Digital has introduced the first delta-neutral LPs in a peer-to-pool derivatives DEX, designed to greatly enhance capital efficiency, collateral options, and liquidity pool size while providing users with an experience comparable to centralized exchanges. This innovative approach to liquidity provisioning provides increased flexibility and control, allowing LPs to earn delta-neutral APR while maintaining their token balance.
In traditional perp DEXs, if a user deposits liquidity of 10 ETH at $100, and the price of ETH rises 10x, they would only be returned 1 ETH at $1000. This is because when users deposit assets as LP, the asset is added to a basket of assets and converted into the protocol’s LP token.
In essence, the user’s LP is no longer ETH or BTC, but GLP, gDAI, or LLP. These LP assets serve as counterparties to traders on their respective platforms. As a result, when the user withdraws their LP, they will be returned the USD value of their LP token instead of their token balance.
For the first time in a derivatives DEX, Aark Digital introduces single asset LP and funding fees. This provides users with delta-neutral APR and liquidity comparable to CEX trading. To ensure this is possible, an architecture is needed that guarantees minimal PnL exposure for LPs.
Cash Settled Perpetual Swap
In Aark Digital, all perpetual swaps are settled in cash (USDC). Therefore, LPs only earn or lose USDC based on the trading activities of traders. This is reflected in the LP’s USDC balance, meaning that the LP’s collateral remains intact while only the USDC balance fluctuates in response to traders’ profit and loss (PnL).
The LP’s USDC balance is solely altered by the following factors:
1. Receiving trading fees and funding fees from traders.
2. Traders’ PnL (increasing if traders lose and decreasing if traders earn).
Aark Digital introduces funding fees as opposed to borrowing fees used by traditional derivatives DEXs. This reduces directional exposure and enhances LP stability, by incentivizing funding-fee-seeking arbitragers to balance open interest (OI) at 50:50. Similar to the CEX model, whenever an asset trades at a premium or discount (mark price) to the index price (aggregate of spot price across exchanges), funding fees force longs to pay shorts or vice versa to balance out OI.
With Aark Digital’s funding fee model, directional exposure of LPs are neutral, as funding fees are updated continuously to balance out OI. Since longs and shorts are direct counterparties to each other, the liquidity pool will only absorb the PnL of OI imbalances. An example would be 2% if PnL of long-short OI is 51:49. In addition, stability is further enhanced by introducing ‘continuous’ funding fees paid out in block intervals instead of the typical 1 or 8 hour interval of alternative DEXs.
In the borrowing fee model of alternative DEXs, the long-short ratio can be skewed up to 90:10, exposing LPs to a potential drain if the market is overwhelmingly long. This model has the benefit of paying out increased borrowing fees to liquidity providers, under the assumption that most traders are not profitable. However, it also has the risk of draining LPs entirely if traders are profitable.
Aark Digital’s delta-neutral LP model provides an innovative approach to liquidity provisioning, enhancing market neutrality and capital efficiency, and giving users much wider collateral options than alternative peer-to-pool models. With the ability to collateralize positions with whitelisted assets and balance OI through funding fees, LPs can earn delta-neutral APRs and maintain their token collateral according to their original deposit. As Aark Digital continues to revolutionize perpetuals trading for professionals, its delta-neutral LP model is sure to play a key role in the platform’s success.
To learn more about our liquidity model and fee structure, visit our gitbook: