AMMs and the process of being an LP are one of the biggest innovations in crypto. We are going to assume some background knowledge, but if you are new to being an LP we suggest you check out some of the resources at the bottom of this page.
Unlike a standard x*y=k AMM, perpetual AMMs can get a little more complicated as we are dealing with leveraged synthetic assets. Rather than swapping real tokens, traders swap virtual assets and the perpetual vAMM stores only UST collateral.
Initially, our pools will use a xy=k model for our perps, but given leverage and the fact that these are synthetic assets, what does that mean in practice?
First, in order to participate in the perpetual pools as either a trader or liquidity provider you must deposit collateral into your margin account.
Traders can take LONG or SHORT positions against a given market (pool) with up to 44x leverage.
Liquidity providers are a class of 'traders' that passively participate in market making, providing a leveraged 'notional amount' of UST worth of asset-UST in the pool.
In both cases, a funding rate exists to push the price of the perpetual close to the spot (oracle) price. The funding rate is paid between traders, including LPs, taking long and short positions.
Since liquidity providers are acting as market makers and automatically take the opposite side of the market, they can expect to earn funding payments in addition to the 0.1% commission on all FX trades.
Providing liquidity on Vertex can seem confusing at first. With any leveraged position or liquidity provision there comes risks, but due to Vertex's FX nature, being an LP is similar to the 'grid' trading strategy made popular on many platforms while also earning fees.
Let's break it down:
Initiate an LP position with a given 'notional value' ie the UST equivalent amount of LP tokens you are willing to offer liquidity on.
2. Two positions are created:
A 'standard' AMM type position. vEUT vs vUST
A short position to offset your vEUT position
You are left with a flat position that is providing liquidity to the market.
WHAT DOES THIS MEAN IN PRACTICE?
LPs start with zero exposure to the market, which means being an LP for perps on Vertex is more of a 'pure' market making experience:
You start with a position that has zero directional exposure
This leaves you with impermanent loss risk.
As prices go up and down the position will get paid fees but also accumulate price exposure to the market:
Initially Position = Flat
Price goes UP = Position gets SHORTER OR Price goes DOWN = Position gets LONGER
You expect the market to not be TOO volatile, or to centre around a mid-point, and to earn fees whilst traders transact with you.
In this sense, it is a super capital-efficient version of the 'grid' strategy popularised by a number of exchanges and crypto bot providers. (SEE RESOURCES) The difference with Vertex is you get exposure to this strategy whilst also earning fees!!