Liquidity Providers
The RAVE Cave(s)
Cavers: Liquidity Providers
Liquidity Providers (LPs) pledge tokens into a respective token Cave to provide counterparty liquidity for traders. LPs receive a yield-bearing kToken representing their share of assets in a Cave. Trading fees such as borrow rates and liquidation penalties accumulate in the token's Cave and are claimed by withdrawing and burning kTokens to claim the underlying token supplied, plus any accrued yield.
Caves earn yield in 3 ways:
Execution Fees: A percentage of a position's collateral gets distributed to the respective Cave each time a trade is opened and closed
Borrowing Fees: Traders pay a per-block interest rate based on the amount of leverage borrowed to the respective Cave when a trade is closed
Liquidation Bonus: Remaining collateral from trades liquidated by RAVE's liquidation engine are deposited into the respective Cave
As a liquidity provider, Cavers take a certain level of risk since counterparty trades may result in a loss for a respective Cave. A Cave acts as counterparties to all quanto trades that utilize the Cave's token as collateral. Leveraged traders borrow quanto assets from the Cave in exchange for an interest rate. Trader losses increase the Cave's holdings, whereas profits decrease the Cave's holdings by withdrawing tokens to settle profit. RAVE implements several risk mechanisms that aim to mitigate these potential risks, described below.
Pool Creation
A liquidity provider may add liquidity to an existing altcoin pool, or create their own altcoin liquidity pool. Creating pools is permissionless, meaning anyone can create a pool. After creating a pool, anyone can provide the corresponding token as LP or create trades, with the corresponding token as collateral.
Pool Withdrawal
Liquidity providers can remove liquidity from an existing Cave to claim rewards, up to 25% at a time every two days. The withdrawn kToken balance is burned to claim a proportional share of tokens and yield. It takes 8 days for a user to completely remove liquidity from a Cave, allowing traders in the respective Cave ample time to close or adjust positions.
Risk Mechanisms
Price Impact
The price impact mechanism employed by RAVE plays a critical role in maintaining balance within Caves by adjusting an individual trade's open. Price impact depends on long and short Open Interest and is incurred only when a trade would widen the difference between longs and shorts, acting as a premium for trades that increase OI skew. Price impact mitigates variance in RAVE by incentivizing traders to balance Open Interest in the pool.
Unlike traditional perpetual decentralized exchanges with deep liquidity of a small basket of tokens, RAVE AV has a wide array of liquidity pools of individual tokens that facilitate trading. Thus, the price impact factor must robust to ensure pool health and optimal trading execution. Price impact takes into account the size of the trade, the size of the liquidity pool, and the long / short balance to skew the price of each trade.
Borrowing Rate
The borrowing fee is the most capital-efficient way of managing capital risk, limiting drawdown risk in volatile markets. RAVE's borrowing rate utilizes a two-kinked interest rate slope, dependent on a Cave's utilization rate. That is, the percentage of the Cave that is taking counterparty risk in all tradable markets.
Much like traditional funding rates, RAVE's borrowing rate is a fee mechanism that minimizes liquidity gaps between open long and short trades over time to prevent overt one sided exposure.
This utilization rate calculates the sum of net exposure for each perpetual market divided by total available Cave liquidity, all denoted in quanto token units. Total available Cave liquidity for each token is determined by the difference between total liquidity and total open interest across all markets. As utilization increases, the borrowing rates become much higher, minimizing risk to liquidity providers.
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