YLP is the platform's liquidity provider token. It can be minted using real cryptocurrencies and burnt to redeem real cryptocurrencies.
Holders of various YLP tokens can earn transaction fees and profit from selling LP tokens at a higher price.
In V3, YFX utilizes multiple single-asset fund pools based on the risk of the underlying assets. Popular trading pairs such as ETH/USD and BTC/USD share one USDC fund pool, while LINK/USD, UNI/USD, and others share another fund pool. Adopting multiple single-asset fund pools reduces staking risks from a major market shift of another cryptocurrency effectively.
Liquidity providers (LPs) can choose to stake in a fund pool with the optimized risk level according to their own risk preferences.
Any user can provide liquidity to a fund pool by buying YLPs. Each fund pool has a net value, which can also be understood as the price of the YLP token. When a user buys YLPs, the YLP received will be calculated based on the current net value. The initial net value is set to 1 when the pool is created. The net value is determined by the aggregated unrealized PNL, funding fees, and borrowing fees accrued by the fund pool. The net value is calculated as follows:
Net Value = (Pool's available balance + Funds in use + all positions' accrued unrealized PNL + accrued borrowing fees + accrued funding fees) / Total supply of YLP
The amount of YLP bought = Assets given by the user / Net Value
Suppose Alice wants to add liquidity to the USDC pool with a current net value of 1.2. Alice uses 12,000 USDC to buy YLPs. In the end, Alice can get 10,000 YLP tokens.
After the successful purchase of YLP tokens, the user's assets will be directly deposited into the vault contract. At the same time, a certain amount of YLP tokens are minted and given to the user. YLP tokens are ERC-20 tokens. Each fund pool has its own YLP Token. YLP tokens cannot be withdrawn or transferred to another wallet address. YLP tokens can only be used for staking.
If a user wants to remove liquidity from a fund pool, they can sell the YLP tokens they have. The assets they can get back will be calculated based on the fund pool's current net value.
Assets returned to the user = The amount of YLP sold x Net Value
Suppose Alice has added liquidity to the USDC pool and holds 10,000 YLP. When the pool's net value increases to 1.3, Alice chooses to sell her YLP tokens. In the end, she will get 13,000 USDC back. Alice's profit from buying and selling YLPs (not counting staking rewards) is (1.3 - 1.2) x 10,000 = 1,000 USDC.
After YLPs are sold, they will be burnt directly, and the corresponding assets will be transferred from the vault contract back to the user's wallet address.
To ensure liquidity providers can remove liquidity at any time, YFX sets an 80% maximum fund usage rate. It means traders can only use up to 80% of funds in the fund pool. Once the maximum fund usage rate is met, the pool will not lend any more funds to traders, and the remaining 20% of funds will be reserved to meet liquidity providers' withdrawal demands.
Users are charged a small handling fee to sell their YLPs. This handling fee is currently set at 0.1%.
Users need to unstake their YLPs first before selling them.
In several LP models, liquidity providers often suffer impermanent losses or have certain long-short position attributes. Common LP models are:
- 1.The dual-currency LP model. In this model, two tokens need to be provided when providing liquidity. Impermanent losses cannot be avoided.
- 2.The synthetic asset LP model. This model supports multiple currencies to add liquidity. Multiple liquidity currencies will generate a token representing the synthetic assets. In this model, liquidity itself often has certain long-short position attributes.
- 3.The single-currency LP model. In this model, each market has its corresponding LPs. Liquidity is not shared between markets. In this model, the overall efficiency of the fund pools is low.