Equilibrium will be launching liquidity pools for supporting market maker activity on its DEX. Our exchange will be the first orderbook DEX in the Dotsama ecosystem. It will be deployed on the Genshiro canary network first and expanded to Polkadot after Equilibrium’s parachain launch.
MM pools will allow liquidity providers to earn yield up to 100% APY on their funds as if they’ve provided liquidity to regular compounded DeFi protocols. Simultaneously, accredited professional market makers will get access to free inventory from these pools to facilitate trading on the DEX, and create liquidity network effects.
Let’s walk you through the details of how MM pools will work.
Why do we need MM pools?
Liquidity is a crucial part of any exchange that attracts active traders. Though, its depth and tiny spreads provided by market makers to an orderbook require quite a bit of inventory. We are solving this chicken or egg problem by incentivizing liquidity providers who got used to having DeFi-like incomes to put their funds into dedicated pools.
There will be four dedicated MM pools for every pair plus a pool for a quote asset (EQD). Each of the pools has a minimum target of its size. You can find numbers for Genshiro below:
How liquidity providers will benefit
Similarly to regular DeFi protocols, liquidity providers don’t need to take any actions but receiving a passive income on their stakes in our MM pools. They can expect up to 100% APY (including upcoming liquidity bootstrapping event) and even increase this yield by locking funds for specified periods.
Here is how this income will be generated:
- Market makers will be sharing 50% of their trading profits with the pools
- Our liquidity farming program offers staking rewards in our native tokens
Liquidity farming rewards can be increased by choosing a specific period for locking funds. Here is how it will work on Genshiro (rewards recounting on liquidity volume multiplied regarding lock period):
What we offer market makers
Designated market makers will be acting in favor of liquidity providers by taking liquidity from MM pools and placing orders to the orderbook. It will be reputable and known trading companies with an extensive track record. Their access to liquidity will be free of charge and we will be even rewarding them for active trading with our native tokens.
Here is the summary of what market makers can expect:
Market makers are eligible for volume rewards if they generate over 5% of trading volume on the exchange and comply with the following parameters of orderbook maintenance:
- spread is less than 2%,
- more than 20 orders booked on each side,
- more than 5,000 EQD booked at 5% spread,
- more than 20,000 EQD booked at 10% spread,
- more than 50,000 EQD booked at 20% spread.
Volume rewards will be distributed in native tokens proportionally to overall market volume for all market makers across the platform. Look at token allocations for Volume rewards:
Staking and unstaking in MM pools
The following operations are available for stakers:
- Deposit an asset into the corresponding pool,
- Request withdrawal of an asset from the corresponding pool,
- Withdraw an asset requested for withdrawal at the end of the next epoch.
Accounting will be done once per epoch (1 Genshiro epoch = 7 days, 1 Equilibrium epoch = 30 days). Liquidity providers can submit a withdrawal request at any time within the current epoch. They will receive funds at the end of the next epoch. Funds requested for withdrawal do not earn rewards. The following example clarifies this mechanic:
Market makers borrowing from the liquidity staking pool cannot move borrowed funds outside of the protocol. But still, staked assets could be lost if a market maker were to lose funds due to unprofitable trading and be unable to replenish its borrowed allocations.
Imagine a situation where users request withdrawals from a certain liquidity staking pool for the amount which is greater than the number of unborrowed funds left in the pool and market makers fail to return borrowed funds in time. This is the event of default.
In this case, staker’s funds may be subject to socialized losses: the number of funds lost will be split among all withdrawing users pro-rata their withdraw amounts. In case of a default, the market maker loses the ability to borrow additional funds from the pool he defaulted on.
Mechanics for market makers
The flow for market makers will be as follows:
- Market makers will be subject to a revolving credit agreement with liquidity providers,
- Market maker accounts can take assets from each of the asset pools,
- Market makers place orders to the orderbook and trade,
- If withdrawals from the pool are higher in magnitude than what’s left unborrowed from the pool, market makers are required to repay assets back to the pool at the end of the next epoch
- Failure to return funds results in default and possible liability (debt) on the MM account in the amount of the shortfall. Defaulted market makers are restricted from further borrowing from any of the pools until the liability is covered in full.
We expect MM pools to become a robust instrument to facilitate user activity on our orderbook DEX. We are planning to run liquidity bootstrapping events on both Genshiro and Equilibrium to raise initial funding for the pools. These events will offer additional bonuses for their participants on top of regular staking rewards. Stay tuned to our announcements soon.
Equilibrium is a cross-chain DeFi super-app that combines a money market and a spot market with margin trading. The platform performs the full gamut of DeFi functions from pooled lending and synthetic asset generation to decentralized trading. EQ is the native utility token that is used for communal governance of Equilibrium and liquidity in its liquidity pools. xDOT is a liquid and tradeable wrapped DOT that unlocks liquidity of DOT locked in parachain auctions and delivers multiple crowdloan bonuses on Polkadot.