Earn Passive Income as a Liquidity Provider on Marginal

Earn Passive Income as a Liquidity Provider on Marginal

May 24, 2024

May 24, 2024

In DeFi , liquidity is the lifeblood that fuels market efficiency, stability, and innovation.

As a decentralized, permissionless peer-to-pool AMM designed for physically settled perpetuals across a wide spectrum of token pairs, liquidity providers (LPs) serve as foundational pillars within the Marginal ecosystem. They pool together fungible tokens to establish robust liquidity pools. LPs on Marginal facilitate seamless trading and also position themselves to potentially earn passive income, all while contributing to a dynamic market environment that shapes the future of decentralized finance.

How Important Are Automated Market Makers (AMMs)?

The foundational concept behind Automated Market Makers (AMMs) deviates from traditional market mechanisms by dismissing the need for order books and market makers to facilitate trades.

AMMs transform the trading process by establishing liquidity pools—smart contracts injected with funds allocated by individuals known as liquidity providers (LPs). These market participants contribute to the core of the AMM by depositing pairs of tokens and creating a new ecosystem where transactions are not dependent on buyer-and-seller matching but on algorithmically determined prices set to maintain constant market liquidity.

AMMs operate on the principle that liquidity providers play a role similar to market makers in that they provide the assets necessary to buy or sell a particular asset within the DeFi environment, yet they do so passively. They create a matching engine governed by preset rules and mathematical functions, enabling users to trade without substantial waiting times or price slippages, nurturing liquid markets.

LPs are then compensated proportionally to their stake in the liquidity pool; they earn from trading fees and sometimes receive additional incentives like governance tokens, which collectively increase market liquidity and trading volume.

Providing Liquidity on Marginal

Anyone from institutional investors and investment banks to large financial institutions can become an LP. Providing liquidity on Margin is different from conventional setups, with its peculiar model designed for perpetual markets.

On Margin, LPs pool digital assets and price and front leverage based on the pool's efficiency in mirroring the spot market. Marginal’s AMM leans into the liquidity providers’ commitment to maintaining adequate reserves, which traders use to amplify their positions. They borrow against the liquidity pool, instantaneously swapping one asset for another, driving their leveraged exposure to the desired tokens while safeguarding the system with over-collateralization.

LPs on Marginal enable perpetual contracts that are physically settled. Unlike other derivative systems that might prefer cash settlements, Marginal enforces a physical handing over of the assets, with LPs as the central figure ensuring the successful future delivery of the token that traders opt to long or short. In such a dynamic setting, LPs act as suppliers of funds and also as pivotal supporters of a robust perpetual market, enabling expanded trade varieties without the interference of traditional market makers.

The x*y=k Pool Price Curve: Balancing Marginal's Pools

The Constant Product Market Maker formula, x*y=k, is a key player in this environment. It maintains a balance between market liquidity and price stability, and Marginal's pools are solid examples of efficient liquidity provision systems.

For an existing Marginal pool with token balances (x, y), a trader keen on a leveraged position for the X token against Y interacts with the pool contract. Through this engagement, they borrow liquidity—which is essentially providing leverage—and diminish the pool's available reserves. This borrowing and swapping process, operated by the AMM, allows the trader to amplify their exposure to X.

In this symbiosis, the liquidity pool acts as a safeguard against price volatility and a facilitator for trades, even for the most volatile assets. The resilience of these pools depends on the robustness of the algorithm ensuring that the liquidity providers’ capital is cycled back into the market efficiently. Should a trader's margin drop perilously, the protocol allows for liquidation, preserving the liquidity pool's integrity.

Liquidity providers make all this possible: they architect a foundation where lending, trading, and risk management coalesce to deliver a seamless experience for leverage seekers. They ensure that Marginal's perpetual market isn't just a sophisticated financial tool but a fertile ground where passive income can thrive on the blockchain, redefining engagement for market liquidity providers and traders alike.

How Do Liquidity Providers on Marginal Benefit?

Marginal offers liquidity providers not just a chance at passive income, but also strong safeguards against extreme impermanent loss and debt. Here is a breakdown of the advantages and incentives that come with being an LP on Marginal:

1. Passive Income for LPs

For any crypto liquidity provider on Marginal, pulling together financial assets into liquidity pools is not just about bolstering the market's efficiency—it's a pathway to passive income. LPs earn from the trading fees paid by traders taking leveraged positions when they sell assets. By simply choosing to continually provide liquidity, LPs are rewarded, paving a gateway to consistent returns without the need to actively manage trades. This system appeals to participants seeking to capitalize on their holdings, as they can harness the perpetual motion of market conditions for financial gain.

2. Unique Hedging Mechanisms

Part of what sets Marginal apart is its unique insurance mechanisms that guard against one of the primary concerns for any crypto liquidity provider: Impermanent Loss (IL). Unlike the conventional pools where assets could temporarily lose value relative to the market, Marginal's approach mitigates this concern. Marginal proactively prevents IL by automatically triggering the protocol to implement a hedge whenever a leveraged position is opened. This means that even in volatile market conditions, liquidity providers' contributions are protected against fluctuations that typically erode the value of pooled assets on other platforms.

3. Protections Against Bad Debt

Marginal pools offer Liquidity Providers (LPs) reliable safety even in market turmoil, guaranteeing absolute protection from bad debt with every liquidation. Its mathematical model ensures that LPs won’t face losses, regardless of the liquidation prices. Thanks to the deterministic safety for LPs via the 'impermanent gain' protection mechanism, there's no urgency for immediate liquidations—bad debt simply isn't an issue for LPs at any price point.

As noted by 0xTwap, "When extreme price movements occur, these insurance funds perform better than the liability owed ("impermanent gain" mechanism). The amount of insurance funds used is set in such a way that LPs are deterministically ensured to get at least the original liquidity lent out back regardless of the price at which liquidations occur. This means that LPs should never experience bad debt no matter regardless of liquidation price” This added layer of security allows Marginal to utilize a longer Time Weighted Average Price (TWAP) of 12 hours, creating a more robust and manipulation-resistant price oracle.

How to Get Started as an LP on Marginal

To provide liquidity, the process mirrors that of Uniswap V2. Here’s the step-by-step process:

  1. Selecting a Market: Begin by choosing from existing markets on Marginal or by creating a new one. To create a new market, ensure there's an existing Uniswap v3 spot pool.

  2. Customize Your Parameters: When creating a new market, you'll need to specify the tokens involved, stipulate the max leverage and maintenance margin, and utilize the Uniswap v3 oracle.

  3. Pooling Your Liquidity: With the market chosen, pool your tokens—this step is similar to that on Uniswap v2. Marginal streamlines the experience, with liquidity provision as intuitive as it gets.

Be aware, as with lending protocols like Aave, that the liquidity you provide may encounter lockups driven by pool utilization. Rest assured, Marginal guarantees the retrieval of your liquidity, although the timeline hinges upon the pool's utilization rates.

Join Marginal’s LP Movement

Marginal has reimagined the role of liquidity providers in DeFi by creating a platform where their contributions are not only essential to market health but also rewarded through thoughtful mechanisms designed to counter volatility and impermanent loss. With Marginal, LPs are equipped with innovative tools to easily earn passive income in a secure and stable environment, contributing to a future where DeFi is more accessible, efficient, and profitable for all. Embrace the opportunity to become part of Marginal's pioneering liquidity provision movement and unlock the full potential of your digital assets.

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Go long or short any token with leverage.

Go long or short any token with leverage.