π€How does it work?
Types of Orders
Buy-to-Open orders: Buys index token to open a long trade;
Increases Long open interest
Sell-to-Close orders: Sells index token to close a existing long position;
Decreases Long open interest
Sell-to-Open orders: Sells index token to open a short trade;
Increases short open interest
Buy-to-Close orders: Buys index token to close a existing short position;
Decreases short open interest
How does Liquidity Pool facilitate trade?
Inherent to MYX's non-order book framework is a characteristic disparity in long and short open interest. Liquidity Pool serve as counterparties and subsequently transfer positions to match long and short traders in a delayed fashion.
Liquidity Pool passively takes on positions
Liquidity Pool assumes passive positions and acts as counterparties to facilitate instantaneous trades. The Liquidity Pool reserves collateral, thereby meeting full potential loss-related obligations.
Market is at equalibirum. If Alice opts to go long with 1 BTC, Liquidity Pool passively undertakes a short position while reserving 1 BTC as collateral. Alice's theoretical maximum profit is capped at 1 BTC at a price of infinity for BTC.
Market is at equalibirum. If Alice shorts 1 BTC at a price of 30000, Liquidity Pool passively takes a long position while allocating 30000 USDC as collateral. Covering the theoretical maximum profit for Alice of 30000 USDC at a price of 0 dollars.
Liquidity Pool closes positions and matches long and short traders in a delayed manner
Should a trade decrease the imbalance, LPs close existing positions and unlock capital, allowing existing traders to become counterparties to each other until one of the parties is liquidated or closes their positions.
Example:
Suppose the market is skewed by 10 BTCs favoring longs. Alice shorts 1 BTC, LP closes 1 BTC worth of short positions in response and transitions the short exposure to Alice. Liquidity Pool is subject to potential profit and loss due to this transaction of closing its positions.
Funding Fee, Balanced Market and improved capital efficiency
Funding fees are paid by the dominant party of the traders to the other every 8 hours. Managed correctly, Market Makers can effectively earn funding fees through liquidity provisioning while hedging exposures to the underlying asset price fluctuations.
Statistically, funding fees and market-making activities lead to a balanced long and short open interest ratio of approximately 50:50.
In a balanced market, LPs assume minimal exposures. Given the low utilization rate , LPs stand prepared to accommodate a higher volume of trading activities.
While the Matching Pool Mechanism engine maintains its superior capital efficiency in an imbalanced market context, it demonstrates an extraordinary capital efficiency that surpasses traditional P2Pool engines in a balanced market environment.
Hedging risks for LPs
Scenarios may arise where the elevated funding rate proves inadequate to improve market imbalance, resulting in a significant skew toward one side. In such instances, it becomes prudent for Liquidity Providers aiming to avoid capital fluctuations to hedge their positions, particularly as the market bias intensifies.
While LPs could opt to not hedge their positions, thereby potentially capitalizing on trader losses or making losses on trader gains.
LPs could look to hedge their passive positions in other markets like centralized exchanges. Due to the two-token design of the LP pools, exposures are easily identifiable and manageable for LPs.
Automated Delevaraging (ADL)
Following a period of expanding trading volume and a balanced market environment, open interests can surge to magnitudes many times greater than that of the liquidity pool. While this enhances the returns for Liquidity provisioning, it also poses challenges in certain scenarios.
In scenarios where the pool's utilization reaches maximum capacity, all incoming opening orders face rejection, whereas closing orders and liquidations remain unaffected.
The limitation of capital prevents Liquidity Providers (LPs) from assuming additional positions, rendering the process of closing or liquidating positions, which would otherwise exacerbate the market imbalance, impractical.
To mitigate this challenge, MYX has implemented an Automatic Deleveraging (ADL) system. This mechanism force closes the most profitable opposing positions, thereby concurrently reducing both the long and short Open Interest (OI) by an equivalent margin. The system can be deleveraged without the help of any additional capital.
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