Liquidity Providers

Earning as a Liquidity Provider on Lynx

In this section, we examine the role of liquidity providers on Lynx. To see a tutorial on 'How to Supply/Remove Liquidity', see:

Choosing a Liquidity Pool

Liquidity providers (LPs) play a key role on Lynx by funding the pools that users trade against, with deeper liquidity supporting higher trading volumes on the platform. LPs are therefore compensated by earning a portion of the platform's trading fees.

LPs can supply into any of Lynx's single-asset liquidity pools to earn the fees generated by that pool without experiencing any impermanent loss. Supplying into single-asset pools provides tailored exposure to the specific asset deposited rather than broad exposure to a multi-asset basket.

Fees are earned in the same asset that was supplied. For example, supplying USDC into the USDC pool returns fees generated in USDC.

Supplying Liquidity

Note: We use the ticker TKN as a generic symbol to represent any ERC-20 token.

After providing liquidity to one of Lynx's liquidity pools, the pool will mint and credit the supplier's wallet with lxTKN (receipt tokens). lxTKN represents a liquidity provider's share of the pool to which they supplied. LPs receive lxTKN according to the specific liquidity pool they supplied to (eg. Supply to the DAI pool and receive lxDAI).

The mechanism for minting lxTKN is based on 1-hour epochs. Upon supplying your assets, your desired lxTKN will be minted and received starting at the end of the epoch. Depending on when you enter the current epoch, this can occur between 0 and 1 hour later.

The amount of lxTKN suppliers receive is determined by the exchange rate at the time of minting, not at the time it was supplied. For example, if an LP deposits 10 DAI when the exchange rate is 1.00 lxDAI/DAI and the exchange rate then increases to 1.50 lxDAI/DAI just before the lxDAI is minted, a liquidity provider would receive 15 lxDAI (1.50 lxDAI for every 1 DAI they supplied).

Removing Liquidity

Note: We use the ticker TKN as a generic symbol to represent any ERC-20 token.

Similar to supplying TKN liquidity, the system for removing TKN is based on 1-hour epochs. When you request to remove your TKN liquidity, your lxTKN will be redeemed and the underlying TKN dispersed to you starting at the end of the epoch. Depending on when in the epoch you request to remove your TKN, you will receive your TKN back between 0 and 1 hour later.

When LPs remove TKN liquidity, their lxTKN is redeemed according to the pool's exchange rate at the end of the current epoch, not at the time the request to remove TKN was made. For example, if an LP requests to redeem 10 lxDAI when the exchange rate is 1.50 lxDAI/DAI and the exchange rate then decreases to 1.00 lxDAI/DAI just before the DAI is received, a liquidity provider would receive back 10 DAI (every 1.00 lxDAI exchanged for 1 DAI).

Note: When removing liquidity, users set a slippage tolerance. Should the exchange rate change more than the specified slippage tolerance, the transaction redeeming lxTKN for TKN would be canceled and the lxTKN returned to the user.

lxTKN Exchange Rate

Each liquidity pool possesses an exchange rate that determines the current value of its lxTKN. The exchange rate for lxTKN is calculated by dividing the amount of TKN belonging to the specific pool by the amount of lxTKN minted for that pool. For example, assume 115,000 DAI belongs to the DAI pool and a total supply of 100,000 lxDAI has been minted. The lxDAI exchange rate would be 1.15 (ie. every 1.00 lxDAI is worth 1.15 DAI).

To determine the amount of TKN belonging to the pool, the system must take into account both the TKN sitting in the pool at that time but also the pool's unrealized PnL: the potential changes the pool would incur if all open positions were closed at once. This unrealized PnL can be a net positive value (traders owe the pool) or a net negative value (the pool owes the traders). Note: While a pool's unrealized PnL can be negative, Lynx's use of protocol safeguards prevents the amount of TKN belonging to the pool from ever being negative. This ensures every pool stays solvent, even under extreme market conditions.

Unrealized-PnL Updates

Every epoch advancement, the system calculates the unrealized-PnL for each pool to determine its outstanding inflows and outflows and calculate the true amount of TKN belonging to it; the lxTKN exchange rate for that pool is then updated accordingly. At these epoch changes, the exchange rate is highly accurate and the system can process lxTKN minting and redemption requests using the fairest exchange rate.

Risks

LPs should consider the following economic and technological risks:

  • Counterparty Risk: LPs serve as the counterparty to traders (see more here). LPs can therefore lose or earn depending on the performance of traders.

  • Smart Contract Vulnerabilities

  • Temporary Liquidity Crunches: In times of high pool utilization, LPs may have to wait a bit before being able to withdraw; during these times, LPs earn high interest from traders (see Protocol Safeguards)

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