Liquidity Provision

Liquidity Provision is the most important part of RateX. Liquidity Providers deposit YBA as collateral to mint synthetic YT and ST, and builds a time-decaying AMM model.

The Process for Depositing and Withdrawing Liquidity

Depositing Liquidity:

1. Deposit Liquidity: The Liquidity Provider (LP) deposits a single YBA as collateral into the liquidity pool.

2. Mint Synthetic ST: Based on the market value of the liquidity and its price to ST, the protocol mints the corresponding amount of synthetic ST for the LP.

3. Mint Synthetic YT: Based on the synthetic ST held by the LP, the protocol mints the corresponding amount of synthetic YT and records the LP’s yield payment obligation on the synthetic YT. At the time of minting synthetic YT, both +YT and -YT position are created, resulting in a net zero synthetic YT position for the LP.

4. Build AMM Trading Pair: The YT and an equivalent value of ST are paired to form the AMM.

5. Reserve Vault: The remaining ST and -YT positions are stored in the reserve vault.

Withdrawing Liquidity:

1. Close YT Position: The LP’s net synthetic YT position should be closed first, leaving only ST.

2. Withdraw Liquidity: The LP withdraws the YBA based on the proportionate value of ST held in the Liquidity Pool. If the net -YT position cannot be fully closed due to insufficient YT liquidity or slippage, it leaves in LP Residual along with the corresponding amount of ST. The LP can withdraw the residual once YT liquidity is restored.

Key Features of the Liquidity Provision Mechanism

1. Time-Decaying Impermanent Loss: As the AMM’s value diminishes over time, its share of the total value in the liquidity pool gradually approaches zero. This reduces the potential impermanent loss for LPs in expiring contracts, eventually eliminating it.

2. AMM Rebalancing: Because the value of YT decreases with each yield payment, the amount of ST in the AMM must be adjusted accordingly. The AMM rebalances itself based on the new value of YT.

3. Liquidity Concentration: RateX’s YT/ST uses Uni.V3’s liquidity concentration mechanism, which enhances the efficiency of liquidity provision.