LP Returns
LPs earn when traders lose. Returns can be summarised as:
The incentives are aligned in such a way that all the profits from the trades are paid directly to the liquidity providers.
Say there are $10,000,000 worth of open long positions and $8,000,000 worth of short positions. In this scenario, the funding rate would be positive and longs will pay shorts. For a funding rate = 0.1% :
- total payment from long positions = $10,000,000*0.001= $10,000
- total payment to short positions = $8,000,000*0.001= $8000
- difference earned by the pool = $10,000-$8000=$2000
To understand how funding rate is calculated, please refer to:
For simplicity, let's assume all $10,000,000 long and $8,000,000 short positions were opened at $10,000 price of BTC. Now if the price moves to $10,500:
- uPNL for longs = $500,000
- uPNL for shorts = -$400,000
- difference earned by the pool = $100,000
Last modified 2yr ago