What is a Market Making Vault?
First, some context. Ostium’s pool-based model extends liquidity to traders through a Shared Liquidity Layer (SLL). This layer enables trading on Real World Asset perpetuals without reliance on institutional market makers. Instead, anyone can participate as a Liquidity Provider, acting as a de facto market maker, extending maker liquidity to traders with USDC as universal collateral.
In exchange for the potential risk LPs take on as counterparties to trades, they are rewarded with a majority of trading fees captured by the protocol: 100% of liquidation rewards and 50% of opening fees.
Sound familiar? This model bears many similarities to that of other pool-based perpetuals exchanges. LPs on Ostium extend liquidity to traders, acting as their counterparty, and in return receive a majority of trading fees.
However, the status quo LP model has two major drawbacks:
- It pits LPs and traders directly against one another, creating an adversarial relationship.
- LPs are often subject to large fluctuations in LP token value during periods of market dislocation, due to:
* The highly correlated nature of assets in the LP pool – when the market rips, most assets move together and LPs get rekt
* The lack of any buffer liquidity to absorb fluctuations in trader PnL, which is instead directly absorbed by the LP token
Ostium’s liquidity layer is unique in that it attempts to solve for both of these issues simultaneously. But how?
Towards an Uncorrelated LP Profile
Ostium’s Shared Liquidity Layer design is motivated by two aims:
1) To minimize the adversarial nature of the relationship between LPs and traders, creating positive-sum win-win games, and
2) To minimize the volatility and drawdown risk for LPs, with vault LP ownership eventually approximating a risk profile uncorrelated to the rest of the crypto market (but in the form of a crypto-native, organically yield accruing asset).
How? Ostium’s Shared Liquidity Layer (SLL), contains a dual vault structure. It has two core capital pools:
- Liquidity Buffer: The settlement layer for trader PnL, accumulating value during periods of net trader losses and shrinking during periods of sustained trader gains. It does not accumulate trading fees and cannot be deposited into directly or withdrawn from by LPs, acting as a buffer;
- Market Making Vault: Settlement for trades in the event the Liquidity Buffer has yet to accrue value, as in the early days of the protocol, or is depleted by a recent string of trader gains. LPs deposit (and/or lock) capital into the LP Market Making Vault and are rewarded for the risk they take on of potentially needing to act as counterparties with liquidation rewards and a majority of trading fees.
This dual structure affects Ostium’s liquidity model in several key ways.
- LPs benefit more from higher volumes and resulting higher trading fees than they do from negative trader PnL, as potential trader losses accrue first to the to Liquidity Buffer, rather than directly to the Market Making Vault, and
- Trader PnL effect on LP ownership is dampened, with the Liquidity Buffer absorbing volatility. It accrues USDC when traders have a string of losses, and becomes depleted when traders have a string of gains – rather than these natural fluctuations immediately impacting LP token value.
The final, critical piece for LPs is the nature of the assets for which LPs extend liquidity. Ostium offers trading on dozens of Real World Assets, from forex, to energy, metals, and agricultural commodities, to major foreign indices – and eventually, to every liquid market on earth.
These varied assets and asset classes are largely un- or anti-correlated, enabling, on average, less capital needed per unit of risk. In other words: more capital efficiency through natural diversification. Instead of acting as the counterparty to positions on a small number of highly-correlated crypto assets, LPs act as the counterparty to positions on mostly uncorrelated TradFi assets. You can read more about how we quantify these risks here, reaching favorable conclusions about RWA-liquidity LP pools as compared to crypto-only liquidity LP pools.
If you want to learn more about Ostium’s trading engine or test the product on testnet, visit the application here or see our list of markets.
TL;DR
- Deposit Derby: Early access to Ostium’s Market Making Vault starts on Tuesday, 7/9, with the Deposit Derby running until August 1st.
- Boosted Yields: Earn boosted yields for deposits, with a minimum locking period of 45 days and a maximum of 365 days.
- Liquidity Model Objectives:
* Minimize adversarial relationship between LPs and traders.
* Reduce volatility and drawdown risks for LPs.
* Facilitate steady flow of capital from protocol-generated fees to LPs.
- Market Making Vault:
* Features a dual vault structure: Liquidity Buffer (buffers short term trader PnL fluctuations) and Market Making Vault (accrues protocol rewards + settles trades before Liquidity Buffer filled).
* Combined, this dual vault structure is composes the Shared Liquidity Layer (SLL), which extends liquidity to traders with USDC as collateral.
* Vault rewards LPs with 100% of liquidation rewards, 50% of opening fees, and 100% of volatility fees.
- Benefits for LPs:
* Higher benefit from trading fees than from trader PnL.
* Dampened impact of trader PnL on LP ownership.
* Exposure to diverse, uncorrelated assets, enhancing capital efficiency.
- Diverse Assets Include: forex, energy, metals, agricultural commodities, and major foreign indices.
Deposit here.
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