Heyo stormers! ✌️
In this article, we invite you to explore how liquidity provision works, where the liquidity goes, and the associated risks when providing liquidity on Storm Trade.
What is liquidity provision?
Liquidity Provision is a way to earn passive income by depositing your assets into a pool, where they are utilized by the protocol.
In exchange for the use of liquidity in trading, the exchange rewards providers with a portion of the profits generated from operations conducted within the protocol.
To ensure safe and efficient storage of liquidity on Storm Trade, an audited Vault smart contract has been implemented.
How is liquidity used?
Let’s look at the flow of funds within the Storm Trade protocol (see Fig. 1).
Consider an individual providing liquidity to the Storm protocol [USDT LP]. Their funds are directed into the USDT Vault, designed for collecting and storing liquidity.
The movement of funds within the vault is directly dependent on trading activities on the Storm exchange. Traders open and close positions, pay trading fees, and their funds may be liquidated. From all these actions, liquidity providers earn income.
A portion of the fees, funding, and all negative P&L from traders are sent to the vault as rewards for providers, while positive P&L is paid out from the vault as rewards to traders.
Thus, Storm Trade acts as an intermediary between traders and liquidity providers, enabling both sides to earn effectively.
Why is liquidity provision profitable?
First, providing liquidity on Storm Trade is done with a single token, rather than a pair, as in standard pools. This means you don’t need to find a second token or sell half of your existing assets to invest in pools.
In addition to traders' negative PnL, liquidity providers receive rewards in the form of:
-
70% of all trading fees from the protocol;
-
35% of liquidation penalties;
-
RP rewards through the RP mining program;
-
70% of the funding paid by traders.
Why liquidity provision is not staking?
The mechanisms of staking and liquidity provision have completely different internal logic. While staking guarantees a positive return without using staked tokens in trading, provided liquidity becomes part of a pool from which traders borrow funds for margin trading, which can result in both profits and losses.
What is SLP?
SLP is the Storm LP token, which reflects the ratio of the funds earned by liquidity providers to the amount of liquidity they provided.
If SLP equals 1, it means the earnings of liquidity providers are equal to those of traders. If SLP > 1, providers are earning; if <1, they are losing (see Fig. 2).
The chart above shows that the USDT-SLP rate has increased from 1 to 1.19 since the pool’s launch. This means that from April to August 2024, providers earned 19% by providing liquidity in USDT.
Liquidity pool profitability
In addition to the SLP rate, the statistics section shows the profitability of the vaults. Let's look at them using the example of TON-SLP (see Fig. 3).
APR shows us the annual percentage return in this pool. APR is calculated based on the pool's income over the last 7 days and projected forward for the year, showing an approximate expected return. APR is calculated instantly and does not show a guaranteed return.
Meanwhile, ROI shows the percentage of profit already earned by liquidity providers over a specific period.
For example, in Fig. 4, we see that by investing in the vault now, providers plan to receive a 19.16% annual return. Cumulatively, all early providers earned 12.49% since the pool’s launch when the TON price was $2.
Risks for providers
Temporary losses for liquidity providers, when traders collectively trade in profit, are called impermanent losses.
Impermanent losses, as the name suggests, are temporary. They occur when the total profits of traders exceed the fees they’ve paid. Since all trader profits are paid out from the vault, the SLP token’s rate may experience a temporary dip, as shown in Fig. 4.
However, these dips are the best time to add liquidity because traders’ fees will continue to accumulate in the vault, ensuring a global positive trend in the SLP rate.
Liquidity provision - long-term profitability
Let’s provide some statistics. The chart below (Fig. 5) shows the change in gTrade traders’ PnL over 2022-2024. The blue bars show daily PnL changes, while the dark blue line represents cumulative PnL change. This chart shows that by June 2024, traders collectively lost more than $10 million, which is only -5% of position collateral.
This distribution proves that liquidity providers win over longer timeframes.
Conclusion
By explaining the concept of liquidity provision, its pros and cons, and its differences from staking, we hope to have helped you understand how this mechanism works. Remember to practice risk management, trade only with amounts you can afford to lose, provide liquidity wisely, and enjoy the balanced product we strive to create.
Thank you for reading. Always your Storm team!
Join our community and be the first to know the news 👇
Super-Chat | Website | News | Twitter
More info about Storm Trade 👇