🫗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 DEXes.

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 the usual 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'r limited by finding a counterparty, and you'r also very reliant on the liquidation system to be efficient in order to make sure that the winning trader gets his profits (and to prevent accruing bad debt as a platform).

In the asset backed based perp-DEX, a trader counterparty is... himself and the LP pool (depending of direction of the trade, see below).

In the case of a Long trade, the user borrow the long exposure of the asset based on his leverage from the Liquidity pool (there is no actual borrow, he locks assets in the pool borrows the long exposure) from there two 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 loose capital, and accrues fees.

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

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.

• trader is right, trader profits, the liquidity Pool pays stable coins to the trader but accrues fees

• trader is wrong, 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 of 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 is not as capital efficient, but the convenience of the 0 slippage trades makes it popular, and so profitable.

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

An important parameter in this model are the Pool Assets' ratios. You want to maximise trading volume and so provide as much volatile assets, but you also need to control the pool overall long exposure to such asset. Rebalancing during a market downturn is essential.