Liquidity Providers

Overview for liquidity providers.

Liquidity Providers

LP also needs to pledge alt coin to the collateral pool. Unlike the trader, LP does not need to choose a direction but directly acts as the counterparty to the trader. Additionally, LP earns yield from trading fees and liquidations. Unlike artificially inflationary LPs that may simply mint tokens as yield, Krav's LPs earn real yield, meaning yield is generated from real trading fees. A certain level of risk exist for any LP in that trade impacts may result in losses. However, KRAV impliments several risk mechanisms that aim to mitigate such potential risks, described below. For additional information see the KRAV's medium article on risk mechanisms.

Pool Creation

A liquidity provider may add liquidity to an existing altcoin pool, or create their own altcoin liquidity pool. Creating pools is permissionless, meaning anyone can create a pool. After creating a pool, anyone can provide the corresponding token as LP or create trades, with the corresponding token as collateral.

Pool Withdrawal

A liquidity provider can remove liquidity from an existing altcoin pool, but they are limited to withdrawing up to 25% at a time every 2 days, giving traders participating in the altcoin pool ample time to close their positions.

Risk Mechanisms

Price Impact

The price impact mechanism employed by KRAV plays a critical role in maintaining balance within the liquidity pools by adjusting an individual trade’s open price based on the existing imbalance between long and short positions. The price impact skews the open price for any given trade, acting as a premium. Price impacts are only incurred when a trade acts to further imbalance the longs and shorts, thereby mitigating net PnL impacts on the pool and incentivizing traders to balance the pools.

Unlike traditional perpetual decentralized exchanges with deep liquidity of a small basket of tokens, KRAV has a wide array of liquidity pools of individual tokens that facilitate trading. Thus, the price impact factor must be more aggressive to ensure liquidity pool health. Price impact takes into account the size of the trade, the size of the liquidity pool, and the long / short balance to skew the price of each trade.

Funding Rate

The funding fee is the most capital-efficient way of managing risk of live trades, limiting drawdown risk in case of violent market movement. Much like traditional funding rates, KRAV’s funding rate is a fee mechanism that minimizes liquidity gaps between open long and short trades over time to prevent overt one sided exposure.

Funding rate is calculated based on the difference in total open interest between long and short positions. The side with the dominant open interest pays funding fees to the opposite side, with individual payouts proportional to the position size.