🫗Peer-to-Pool Perp Model (and the risks as a Liquidity Provider)

The goal of this page is to present the widely used but often unclear Asset Backed Perpetuals model (a la GMX)

Adrena platform uses an Asset Backed (or peer-to-pool) Perp Model (similar to what GMX introduced).

This ingenuous system removes a lot of risks usually present in order-book based Perp DEXs.

One can think of this model as a PvE model rather than the usual PvP model, enabled by the Liquidity Providers (ALP holders) that provide liquidity to traders to leverage their trades.

In a typical order-book based Perp DEX, when a trader opens a position, the counterparty is another trader betting in the opposite direction. In that system, you are limited by finding a counterparty and are also highly reliant on the liquidation system’s efficiency to ensure the winning trader receives their profits (and to prevent the platform from accruing bad debt).

In the asset backed based Perp DEX, traders' counterparty is... themselves and the LP pool (depending on the direction of the trade, see below).

Long Trade

In the case of a long trade, the user borrows long exposure of the asset based on his leverage from the Liquidity pool (there is no actual borrowing, as the trader locks assets in the pool to gain long exposure)

. This leads to two possible outcomes:

• Trader is right, trader profits. The Liquidity Pool was deprived of the long exposure that goes to the trader instead. The pool does not lose capital, and accrues fees.

• Trader is wrong, trader eventually gets liquidated on his initial collateral. The locked long exposure is released. The pool accrues fees.

Short Trade

In the case of a short trade, the user borrows stablecoins from the Liquidity Pool based on the platform's maximum profit (100%). Short positions have a limited upside, that's a limitation/security of this model. This leads to two possible outcomes:

• Trader is right, trader profits. The liquidity Pool pays out stablecoins to the trader but accrues fees

• Trader is wrong, and the trader eventually gets liquidated on his initial collateral, the locked short exposure is released. The pool accrues fees.

As we can see, the model is not really Trader VS. Liquidity provider.. it is, but only partially depending on the actual trade direction. Also, traders' losses don't go to the LP in our model, the revenues are entirely originating from fees.

This model may not be as capital efficient, but the convenience of zero slippage trades makes it popular, hence profitable.

This model is also limited by the size of Liquidity Pool.

An important parameter in this model is the Pool's Asset Ratios. We want to maximize trading volume, hence provide as many volatile assets as possible, but we also need to control the pool's overall long exposure to these asset. Rebalancing during a market downturn is essential.