Liquidity Providers
Earning as a Liquidity Provider on Flamix
In this section, we examine the role of liquidity providers on Flamix.
Choosing a Liquidity Pool
Liquidity providers (LPs) play a key role on Flamix by funding the pools that users trade against, with deeper liquidity supporting higher trading volumes on the platform. LPs are therefore compensated by earning a portion of the pool's trading fees.
LPs can supply into any of Flamix's single-asset liquidity pools to absorb a portion of the fees generated by that pool, as well as the profits or losses of traders. Supplying into single-asset pools provides tailored exposure without any impermanent loss to the specific asset deposited rather than broad exposure to a multi-asset basket.
Fees are earned in the same asset that was supplied. For example, supplying FLR into the FLR pool returns fees generated in FLR.
Supplying Liquidity
Note: We use the ticker TKN as a generic symbol to represent any ERC-20 token.
After providing liquidity to one of Flamix's liquidity pools, the pool will mint and credit the supplier's wallet with lxTKN (receipt tokens). lxTKN represents a liquidity provider's share of the pool to which they supplied. LPs receive lxTKN according to the specific liquidity pool they supplied to (eg. Supply to the FLR pool and receive lxFLR.
The mechanism for minting lxTKN is based on 1-hour epochs. Upon supplying your assets, your desired lxTKN will be minted and received starting at the end of the epoch. Depending on when you enter the current epoch, this can occur between 0 and 1 hour later.
The amount of lxTKN suppliers receive is determined by the exchange rate at the time of minting, not at the time it was supplied. For example, if an LP deposits 10 FLR when the exchange rate is 1.00 FLR/lxFLR and the exchange rate then increases to 1.25 FLR/lxFLR just before the lxFLR is minted, a liquidity provider would receive 8 lxFLR (1 lxFLR for every 1.25 FLR they supplied).
Removing Liquidity
Note: We use the ticker TKN as a generic symbol to represent any ERC-20 token.
Similar to supplying TKN liquidity, the system for removing TKN is based on 1-hour epochs. When you request to remove your TKN liquidity, your lxTKN will be redeemed and the underlying TKN dispersed to you starting at the end of the epoch. Depending on when in the epoch you request to remove your TKN, you will receive your TKN back between 0 and 1 hour later.
When LPs remove TKN liquidity, their lxTKN is redeemed according to the pool's exchange rate at the end of the current epoch, not at the time the request to remove TKN was made. For example, if an LP requests to redeem 10 lxFLR when the exchange rate is 1.00 FLR/lxFLR and the exchange rate then updates to 1.25 FLR/lxFLR at the end of the epoch, a liquidity provider would receive back 12.5 FLR (every 1 lxFLR exchanged for 1.25 FLR).
Note: If the exchange rate increases between the time the user requested to remove liquidity and the end of the epoch, the user's transaction will be processed using an exchange rate up to 2% higher than when they requested. This limit, akin to a slippage tolerance, may be updated in the future.
lxTKN Exchange Rate
Each liquidity pool possesses an exchange rate that determines the current value of its lxTKN. The exchange rate for lxTKN is calculated by dividing the amount of TKN belonging to the specific pool by the amount of lxTKN minted for that pool. For example, assume 115,000 FLR belongs to the FLR pool and a total supply of 100,000 lxFLR has been minted. The lxFLR exchange rate would be 1.15 (ie. every 1.00 lxFLR is worth 1.15 FLR).
To determine the amount of TKN belonging to the pool, the system must take into account both the TKN sitting in the pool at that time but also the pool's unrealized P&L: the potential changes the pool would incur if all open positions were closed at once. This unrealized P&L can be a net positive value (traders owe the pool) or a net negative value (the pool owes the traders). Note: While a pool's unrealized P&L can be negative, Flamix's use of protocol safeguards prevents the amount of TKN belonging to the pool from ever being negative. This ensures every pool stays solvent, even under extreme market conditions.
Unrealized-P&L Updates
Every epoch advancement, the system calculates the unrealized-P&L for each pool to determine its outstanding inflows and outflows and calculate the true amount of TKN belonging to it; the lxTKN exchange rate for that pool is then updated accordingly. At these epoch changes, the exchange rate is highly accurate and the system can process lxTKN minting and redemption requests using the fairest exchange rate.
Risks
LPs should consider the following economic and technological risks:
Counterparty Risk: LPs serve as the counterparty to traders (see more here). LPs can therefore lose or earn depending on the performance of traders.
Smart Contract Vulnerabilities
Temporary Liquidity Crunches: In times of high pool utilization, LPs may have to wait a bit before being able to withdraw; during these times, LPs earn high interest from traders (see Protocol Safeguards)
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