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Who is the Liquidity Provider?

Terminology

A liquidity provider (LP) is one who deposits a collateral asset (USDC) into the Siren liquidity pool. The pool autonomously executes a delta-neutral options market-making strategy.
When traders buy options the collateral in the pool is used as a margin for the corresponding short position that stays in the pool. When traders sell options the collateral in the pool is used to pay premium to traders.
The pool automatically manages its delta-exposure by executing an offsetting perpetual trades on a regular basis.

Providing capital

Capital is accepted into the pool using daily deposit rounds. LPs submit deposit requests for their collateral (USDC) to be added to the pool. Once a day an off-chain keeper calculates pool price per share, adds pending collateral to the pool's liquidity, and distributes LP shares to depositors.

Earnings (APY)

LPs earn yield from bid/ask spread and the difference between options premiums and the cost of hedge.

Withdrawing capital

Withdrawals are managed using weekly withdrawal rounds. LPs submit withdrawal requests for the current round, which is processed every Friday. The cash available in the pool is distributed pro-rata among pending withdrawal requests.
If there is not enough cash in the pool to fulfill all withdrawal requests, remaining portion is automatically rolled into the next round. The pool is designed to reserve each cash inflow to pending withdrawal requests first, before making it available for trading liquidity. However, if the pool utilization is high, it is possible for a withdrawal request to not be filled entirely in a single round. In that case it will be eventually filled in subsequent withdrawal rounds.
Once the current withdrawal round is closed on Friday, LPs can immediately withdraw available cash.

Risks to being an LP

  • Smart contract risk. Siren is an experimental DeFi system and a bug in a smart contract code can cause loss of funds.
  • Imperfect hedge risk. During increased market volatility the pool might not be perfectly delta-hedged which could lead to a loss.
  • Insufficient hedge liquidity or high cost of hedge. In some scenarios, there might be insufficient liquidity to open a hedged position. This can lead to delta-exposure and possible loss.
Please do your own research.
NOTE: This is a living document that will continue to be updated as Siren evolves. To contribute, please visit Siren on GitHub. Specific questions may be answered and technical guidance may also be provided from time to time in the Siren Discord to those who are interested in building on top of the protocol.
Last modified 8mo ago