Liquidity Providers
Providing liquidity to MAYAChain liquidity pools.
Liquidity providers provide assets to the MAYAChain liquidity pools. They are compensated with swap fees and system rewards. Compensation is affected by a number of factors related to the pool and the state of the network.
Liquidity providers commit capital to pools which have exposure to underlying assets, thus liquidity providers gain exposure to those assets, which have free-floating market prices.
While they are paid block rewards and liquidity fees, these are dynamic and may not be enough to cover "Impermanent Losses", which occur when price changes happen.
Liquidity providers should not consider they are entitled to receive a specific quantity of their assets back when they deposit, rather that they will receive their fair share of the pool's earnings and final asset balances.
Compensation
Liquidity providers deposit their assets in liquidity pools and earn yield in return. They earn tokens in Cacao and the pool's connected asset. For example, someone who has deposited in the BTC/CACAO pool will receive rewards in BTC and CACAO.
Yield is calculated for liquidity providers every block. Yield is paid out to liquidity providers when they remove assets from the pool.
Rewards are calculated according to whether or not the block contains any swap transactions. If the block contains swap transactions then the amount of fees collected per pool sets the amount of rewards. If the block doesn't contain trades then the amount of assets in the pool determines the rewards.
How a block with fees splits the reward. In this example, 1000 CACAO is being divided as rewards:
Pool Depth (CACAO)
Fees
Share (of Fees)
Rewards
1,000,000
1000
33%
333
2,000,000
0
0%
0
3,000,000
2000
67%
667
6,000,000
3000
100%
1000
This ensures that yield is being sent to where demand is being experienced - with fees being the proxy. Since fees are proportional to slip, it means the increase in rewards ensure that pools experiencing a lot of slip are being incentivised and will attract more liquidity.
Factors Affecting Yield
Ownership % of Pool – Liquidity providers who own more of a pool receive more of that pool's rewards.
Swap Volume – Higher swap volumes lead to higher fees. Higher fees lead to higher rewards for liquidity providers.
Size of Swaps – Swappers who are in a hurry to exchange assets will tend to make larger swaps. Larger swaps lead to greater price slips and therefore higher fees.
Change in Asset Prices -- If the price of the assets change, then liquidity providers will receive more of one and less of the other. This may change yield if yield is being priced in a third asset, ie, USD.
How it Works
Depositing Assets
Depositing assets on MAYAChain is permissionless and non-custodial.
The ability to use and withdraw assets is completely non-custodial. Only the original depositor has the ability to withdraw them. Nodes are bound by rules of the network and cannot take control of user-deposited assets.
Process
Liquidity can be added to existing pools to increase depth and attract swappers. The deeper the liquidity, the lower the fee. However, deep pools generally have higher swap volume which generates more fee revenue.
Liquidity providers are incentivised to deposit symmetrically but should deposit asymmetrically if the pool is already imbalanced.
Rules for Adding and Removing Liquidity
Entering and Leaving a Pool
To deposit assets/ liquidity on MAYAChain, you need:
A compatible wallet with your assets.
Connect to one of Maya Protocol's User Interfaces (El Dorado or ThorWallet).
Add liquidity to any of the active or pending pools. There is no minimum deposit amount, however, your deposit will have to cover the deposit and later a withdrawal fee costs.
Every time you add liquidity, Impermanent Loss Protection time resets.
While Symmetrical additions are recommended, Asymmetrical additions are supported, below are the rules:
If you add symmetrically (%50 Asset - %50 CACAO) first;
You will be able to add liquidity asymmetrically with CACAO later
You will be able to add liquidity asymmetrically with ASSET later but it would create a new LP position
You will be able to add liquidity symmetrically later
If you add asymmetrically (%100 ASSET) first;
You will be able to add liquidity asymmetrically with CACAO later but it would create a new LP position
You will be able to add liquidity asymmetrically with ASSET later
You will be able to add liquidity symmetrically later but it would create a new LP position
If you add asymmetrically (%100 CACAO) first:
You will be able to add liquidity asymmetrically with CACAO later
You will be able to add liquidity asymmetrically with ASSET later but it would create a new LP position
You will not be able to add liquidity symmetrically later
Withdrawing Liquidity
There are 3 factors affecting returns/ yield:
Transaction volume & pool depth: if the volume of the pool is high in comparison to its depth, then liquidity providers will be presented with higher rewards. Conversely, if the volume of the pool is low in comparison to its depth, then liquidity providers will be presented with lower rewards.
Share of the pool: the higher the individual's share of a pool, the higher the returns they're granted. For instance, if a liquidity provider holds a %1 stake in a pool, they will receive %1 of the rewards for that pool.
Fee size: the fees associated with a given blockchain are determined by the blockchain itself, and the rewards received by liquidity providers are directly proportional to the fees charged. As such, a blockchain with higher fees will result in higher rewards for liquidity providers.
Yield Comes from Fees & Rewards
Liquidity providers earn a yield on the assets they deposit. This yield is made up of fees and rewards.
Fees are paid by swappers and traders. Most swaps cause the ratio of assets in the liquidity pool to diverge from the market rate.
Rewards come from MAYAChain's own reward emissions. Reward emissions follow a predetermined schedule of release.
Strategies
Passive liquidity providers should seek out pools with deep liquidity to minimise risk and maximise returns.
Active liquidity providers can maximise returns by seeking out pools with shallow liquidity but high demand. This demand will cause greater slips and higher fees for liquidity providers.
Requirements, Costs
Liquidity providers must have assets to deposit and their assets must be native to a supported chain. There is no minimum amount to deposit in existing pools. However new assets must win a competition to be listed – larger value deposits will be listed over smaller value deposits.
Liquidity providers must pay for security of their assets, since security is not free. This "payment" is the requirement for liquidity providers to hold CACAO, which acts as a redeemable insurance policy whilst they are in the pool. Holding CACAO allows liquidity providers to retain an ability to economically leverage nodes to ensure security of assets. When the liquidity provider withdraws, they can sell their CACAO back to the asset they desire. H
Liquidity providers are not subject to any direct penalties for misconduct.
How Yield is Calculated
When a user deposits assets into a liquidity pool, they are given ownership of Liquidity Units which represent a percentage of ownership of the pool. LUVI is a measure of the relative value of each liquidity unit and is independent of price.
Where:
The yield of a pool uses LUVI value data from the previous 30 days and extrapolates an APR if that performance is repeated over the course of a year. A period parameter may be used to change the number of days of data that are taken into consideration.
Factors that affect LUVI:
Swap fees, block rewards, and pool donations increase LUVI and are the primary yield sources
An increase of the synthetic asset liability of a pool decreases LUVI
An increase in
ASSET DepthorCACAO Depthof a pool increase LUVIChanges in the ratio of
ASSET DepthandCACAO Depthin a pool change LUVIChanges in
ASSET PriceorCACAO Pricedo not necessarily change LUVI
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