LP Risk Minimisation ☔️
The maximum possible loss an LP could incur in a prePO position is known in advance, completely transparent, and presented to the LP on a confirmation screen before they open a position.
Additionally, prePO's unique architecture is designed to heavily minimise the max loss LPs could incur in a position.
This is a significant advantage compared to most other AMMs, where risks are unclear and LPs are often liable to lose significant percentages of their position due to factors like impermanent loss.
Risk Minimisation Mechanics
Long and Short tokens in prePO markets trade within the bounds of a Payout Range, which sets a price floor for each token.
Setting a lower bound on the possible price of Long and Short tokens allows Pregens to control the maximum impermanent loss an LP could incur in a position.
If there was no Payout Range, LPs would be liable to lose 100% of their position in the scenario that a token trended towards $0.
Of course, there are tradeoffs to consider when choosing a token price floor. Learn more about the tradeoffs on the Parameter Tradeoffs page.
When an LP provides liquidity to a prePO market, two AMM positions are opened under the hood. 50% of the deposit is added to the L/preCT AMM and 50% to the S/preCT AMM, using a Zap-like mechanism.
Each AMM position is subject to its own Position Profit or Loss (PPL) which is influenced by a combination of factors, including impermanent loss and market exposure to pool assets.
- PPLS: The S/preCT position PPL
- PPLL: The L/preCT position PPL
- PPLnet: PPLS+PPLL
Given the S/preCT pool provides Short exposure and the L/preCT pool provides Long exposure, PPLS and PPLL are inversely correlated, giving the LP position the properties of a natural hedge.
Variable Market Exposure
Even though LP deposits are divided equally between the L/preCT and S/preCT pools, the Long and Short exposure provided by each pool is not equal.
This difference gives a Long or Short to every LP position, further minimising the maximum loss the LP could incur.
Let's explore where this exposure comes from, and how it minimises LP maximum loss.
As an asset is purchased from a concentrated liquidity pool, the Real Reserves of the asset decrease until the price ceiling is reached, at which point the Real Reserves will be completely exhausted.
Applying this in the context of prePO:
- When an LP deposits into a market when the price of L is <0.5, they get more Long exposure from their L/preCT position than they get Short exposure from their S/preCT position
- When an LP deposits into a market when the price of L is >0.5, they get more Short exposure from their S/preCT position than they get Long exposure from their L/preCT position
The resulting Long or Short exposure offsets losses in the scenario where the most volatile price swings occur.
Let's consider an LP opening a position in a market with a Valuation Range of $20B - $80B and current valuation of $25B.
- The L/preCT component of the LP position consists almost entirely of L tokens
- The S/preCT component of the LP position consists almost entirely of preCT tokens
This LP position has Long exposure, which minimises their maximum loss.
- If the L price increases, the gains from their L/preCT position will outweigh losses due to impermanent loss and the S/preCT position
- If the L price decreases, the losses LP could realise from the L/preCT position are minimal, due to the L price already being close to the floor at the time of deposit
3 Layers of Rewards
LP losses are offset by 3 Layers of Rewards.