In BRMM model, LPs play a role as temporary counterparties to traders. When there is an imbalance between users’ long and short positions, LPs may face net open position risk. However, the funding rate's anchoring effect causes that the BR value will fluctuate around 0 without deviating too far. Therefore, the value of LPs' position is typically much smaller than the total liquidity, and the risk faced by the LPs is limited.
For example, if the total long positions held by users significantly outweigh the short positions, leading to a pronounced imbalance in the liquidity pool, then holders of long positions will face increased pressure from the funding rate. At the same time, this situation provides arbitrageurs with continuous opportunities for spread and funding rate arbitrage. Given this dynamic, it's very unlikely for tokens with ample liquidity to remain a significant imbalance for an extended period. Thus, we refer to this type of loss, which arises from LPs holding temporary net open positions, as "Temporary Loss".
Because the risk faced by LPs is limited, in Equation protocol we allow LPs to provide liquidity with high leverage. LPs can set their own leverage according to their risk preference when providing liquidity. The introduction of leverage will significantly improve the capital efficiency of LPs.
The income of LPs comes from two sources:
- 1.Liquidity mining rewards.
- 2.A portion of the trading fees.