In this article, we’ll explain the updated liquidity buffering mechanics in Storm Trade that provide stable returns and minimize risks for liquidity providers.
Those who closely follow our announcements know that we’ve already shared plans for a liquidity buffer where the STORM token plays a key role. Now, we’ve made it happen!
Liquidity provision is a popular way to earn in DeFi. Users deposit assets into pools or vaults and earn income through trading fees. However, liquidity providers serve as the counterparty to traders, making them vulnerable to losses, especially during prolonged market trends.
To reduce risks for providers and utilize liquidity more efficiently, Storm Trade has implemented a liquidity buffering mechanism. This buffer minimizes the impact of market trends, ensuring stable yields with smoother price movements.
🪙 How is the SLP token price formed?
The SLP token (Storm Liquidity Provision) is a unique token received by users when they provide liquidity to Storm Trade’s vaults. The price of SLP changes depending on traders’ interactions with the liquidity.
SLP Price = Total Provider Funds in the Vault / Total SLP in Circulation
The vault contract now consists of two parts:
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LP Balance: This holds all liquidity provider funds. Previously, all trader payouts were made from this, causing sharp SLP price fluctuations.
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Buffer: This new component is now used to cover all positive P&L payouts to traders, protecting provider funds in the LP Balance.
💰 What is the Buffer and How Does it Work?
The buffer in Storm Trade is a reserve fund within the liquidity vault designed to prevent sharp SLP price fluctuations.
How It Works:
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Fund Accumulation:
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A portion of platform revenues, such as fees, traders’ negative P&L, and funding fees, is directed to the buffer.
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The buffer builds up reserves, creating a cushion for periods of high volatility.
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Buffer Utilization:
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Positive P&L payouts to traders are made from the buffer, not the LP Balance.
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This reduces the load on the main liquidity pool and stabilizes the SLP token price.
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📈 Buffer Efficiency
To understand how the buffer works, let’s analyze Chart 1, which simulates three scenarios:
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No buffer (solid red line).
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Buffer with conservative parameters (dashed blue line).
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Buffer with aggressive risk parameters (dotted line).
1️⃣ No Buffer: Unpredictable Income (Solid Red Line)
In this model, traders’ positive and negative P&L directly affect the liquidity vault (Vault). Profits reduce liquidity, while losses increase it (Chart 1.1).
This system works well during volatile or bearish markets, where traders often incur losses, strengthening the vault. However, during stable or bullish trends, liquidity providers face the following risks:
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Liquidity Reduction: Frequent trader wins shrink the vault.
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Market Dependence: SLP yields drop during prolonged bullish trends.
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Long Break-Even Periods: Providers who enter liquidity during drawdowns must wait longer to recover their investments before earning profits.
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Negative APR: Returns over the last 30 days can become negative.
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Liquidity Outflows: Providers may withdraw funds anticipating further losses.
This model is effective for long-term investors but unpredictable and less attractive for those seeking short-term stable returns.
2️⃣ Conservative Buffer: Stability and Protection (Dashed Blue Line)
In this scenario, 80% of platform revenues from fees and traders’ losses go to the buffer, and 20% are allocated to liquidity providers as income.
This creates a robust reserve to compensate traders’ profits, protecting provider funds during long-term market trends when traders achieve positive P&L (Chart 1.2).
Simulation Results:
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Blue dashed line: The buffer grows consistently for 7 months, building a significant reserve. When market trends shift, the buffer uses its accumulated funds to cover trader payouts, maintaining stable returns for providers.
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Red dashed line: Reflects steady and smooth SLP price growth. Over six months, providers earn about 9% (1.5% monthly) without drawdowns, even in stable markets.
Advantages:
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Full Protection: Trader wins are fully covered by the buffer, eliminating provider losses.
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Buffer Reserves: A larger reserve discourages providers from withdrawing liquidity when the buffer nears depletion.
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Stable Returns: The SLP price grows steadily, even during stable market trends.
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Accessibility: Providers don’t need to time their entry into liquidity.
Limitations:
- Returns may be slightly lower than with more aggressive strategies or no buffer.
3️⃣ Aggressive Buffer: high income with higher risks (Dotted Line)
This model allocates 60% of revenues to the buffer and 40% to providers. While offering higher returns, it risks depleting the buffer faster during extended market trends (Chart 1.3).
Simulation Results:
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Blue dotted line: The buffer grows steadily alongside provider income but risks depletion during prolonged market drawdowns.
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Red dotted line: Shows stable returns of 18% over six months (3% monthly) for providers.
Benefits:
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High returns: LPs earn 36% per annum, significantly higher than the results of the conservative regime.
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Coverage of traders‘ gains: Despite the sharp emptying of the buffer, over the current time horizon it would be sufficient to offset traders’ profits, protecting the main liquidity pool.
Risks:
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Buffer Depletion: With only 60% of revenues allocated, the buffer is more susceptible to depletion if traders consistently profit during prolonged trends.
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Liquidity Pool Drawdowns: If the buffer is depleted, payouts revert to the LP Balance, potentially leading to liquidity outflows as providers wait for the buffer to refill.
🪙 The Role of the STORM token in the buffer system
In future updates, the STORM token will play a key role in balancing the interests of providers, traders, and token holders:
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Dynamic Buffer Management: Excess funds will buy back STORM tokens, while deficits may require token sales to replenish the buffer.
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Deflationary Effect: Purchased STORM tokens will be sent to a reserve, reducing supply and increasing demand.
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Ecosystem Growth: As Storm Trade grows, STORM holders benefit from increased trading volumes and the buffer’s economic model.
🚀 Storm Trade: a new standard for yield
Storm Trade launches an automated buffering system to accumulate funds during low buffer periods and allocate more to providers when reserves are full.
Starting with a conservative mode, Storm Trade will dynamically balance between conservative and aggressive settings to optimize returns.
This approach ensures maximum provider protection and guarantees stable returns. All trader wins are fully covered by the buffer, eliminating temporary losses. Providers earn consistently without drawdowns, and liquidity entry becomes profitable at any time.
With this system, Storm Trade sets a benchmark for reliability and profitability in DeFi on TON. Combined with ChainProof insurance, Storm Trade becomes the most secure platform for passive income in the ecosystem!
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