Introduction
In Equation v1, we introduced a new AMM model based on the liquidity pool balance rate, which can effectively serve the price discovery function of perpetual contracts, while also creating a wealth of market-making opportunities for liquidity providers (LPs). LPs can share the platform's trading fee income by bearing the risk of temporary imbalances in the liquidity pool. We define this new mechanism as the Balance Rate Market Maker (BRMM).
Equation v2 is a significant upgrade to the BRMM algorithm, with major improvements:
Precise passive position for LPs. The liquidity added by LPs corresponds one-to-one with the passively held positions, allowing every LP to know in real-time the size of their holdings and the risks they face. This upgrade gives LPs the ability to hedge risks accurately and enables them to expand a variety of market-making strategies. With this upgrade, Equation theoretically can support any asset with an oracle price.
Multiple fee and leverage tiers. The initial setup includes three default fee levels: 0.02% for a 100x leverage, 0.04% for a 50x leverage, and 0.1% for a 20x leverage. This structure ensures that Liquidity Providers (LPs) are adequately compensated for assuming different levels of risk, while also laying the groundwork for the future creation of markets for any token.
The Risk Buffer Fund (RBF) is removed. Introducing the RBF in Equation v1 aimed to protect LPs from losses. However, it had significant drawbacks: contributors to the RBF's liquidity could not hedge risks, and LPs, being overly protected, were mostly in the highest leverage state, leading to an imbalance in the overall system risk control. Since v2 greatly enhances the risk control ability of LPs, the additional protection provided by the Risk Buffer Fund is no longer needed.
Additionally, we have made some adjustments and optimizations to other aspects of the algorithm to complement the achievement of the upgrade goals.
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