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Liquidity Providers

In the BRMM model, Liquidity Providers (LPs) act as temporary counterparties to traders:
  • When users open/close positions, or get liquidated, LPs always passively open/close positions with the same size as the user, but in the opposite direction.
  • The proportion of passive positions held by any LP relative to the total positions of all LPs, and the proportion of liquidity they provide relative to the total liquidity of all LPs, are always maintained in equivalence.
LPs have three fixed sources of income:
  1. 1.
    A portion of the user trading fees.
  2. 2.
    LPs will always earn funding fees from the passive positions they hold.
  3. 3.
    Liquidity mining.
In addition to the fixed sources of income, if the passive positions held by LPs have a positive PnL, the LPs will also earn additional profits.
Risks:
  • LPs face net open position risk when they hold passive positions.
  • Since LPs can provide liquidity with leverage, they are at risk of liquidation if the losses on passive positions become too large and result in insufficient margin.
We recommend that LPs set reasonable leverage levels and use hedging strategies to manage net open position risk.