Guaranteed Solvency
Safety Mechanisms to Protect Users
Last updated
Safety Mechanisms to Protect Users
Last updated
Using a few simple but effective safety mechanisms, Lynx ensures that winning traders will always get paid what they're owed. While Celsius, FTX, and countless other platforms have left users disillusioned through the misappropriation of user funds, Lynx's 'Guaranteed Solvency' approach allows everyone to trade continuously with confidence in light of any black-swan events or extreme market conditions.
Mandatory Take Profit
The first component to achieve Guaranteed Solvency is the mandatory parameter required for every position. On Lynx, traders set their TP as a percentage which determines the maximum amount their position can earn before it's closed. The gain resulting from the TP is measured against the trader's collateral value.
For example, consider a user who sets a TP of 200% and goes long on BTC/USD with 1000 DAI as collateral. The system first registers the specific price BTC/USD must reach to result in a 200% gain (considering the user's leverage). Should this price be hit, the position would automatically close, resulting in a 200% gain for the trader - an additional 2000 DAI. Upon closing the position, all outstanding fees would be deducted from the 2000 DAI earnings, and the remaining value sent to the trader.
When opening a trade, traders must specify a TP or else the system default will be used. By requiring a TP for every trade, the system knows the maximum amount a position could earn at any given time. In the example above, the system knows the trader has maximum potential earnings of 2000 DAI.
Internally, Lynx earmarks the maximum potential earnings of each trader and characterizes it as 'utilized' from its respective liquidity pool.
This allows Lynx to track each : the ratio between the available assets in the liquidity pool and those utilized. Lynx implements measures to make sure that pool utilization isn’t kept too high for too long as demonstrated by the
Finally, the protocol implements two safeguards to ensure that pool utilization will not cross 100% in any liquidity pool:
Trades that cause pool utilization to cross 100% are rejected.
If the pool utilization reaches 100%, LPs will be temporarily unable to withdraw funds from that given pool (similar to safeguards seen on Compound and Aave); during these times, liquidity providers continue to earn the highest possible interest rate from traders