LogoLogo
LogoLogo
  • Vela Trade
    • Introduction
    • Getting Started
    • FAQ
    • Technical Architecture
      • Pool-to-Peer Mechanism
      • Liquidity Providing
      • VLP Token
        • Minting and Burning VLP
        • VLP
      • Pricing Engine
      • Virtual PNL Delay
      • Crypto Asset-Backed Pools
      • Fee Distribution
    • Perpetuals Specifications
      • Collateral Specification
      • Fees
      • Stop Loss/Take Profit Orders
      • Limit Orders
      • Liquidation
Powered by GitBook
On this page
  1. Vela Trade
  2. Technical Architecture

Liquidity Providing

Liquidity providers (LPs) play a crucial role in the Vela Trade Liquidity Pool (VLP), supplying assets that facilitate trading. Whenever a trade is executed on Vela, it incurs various fees, which are distributed to LPs as rewards. These include:

  • Open/Close Position Fees

  • Margin Fees

  • Liquidity Provision/Withdrawal Fees

  • Swap Fees

  • Liquidation Proceeds (any leftover collateral from liquidated positions is distributed to LPs)

By participating in the VLP, liquidity providers can passively earn yield on their deposited assets, rather than letting them sit idle.

VLP Asset Composition

Vela's liquidity pool consists of only two assets:

Asset
Target Ratio
Min Ratio
Max Ratio

USDC

80%

70%

90%

BTC

20%

10%

30%

The composition of the pool automatically rebalances within these limits to maintain optimal liquidity distribution.

How Liquidity Providers Earn Rewards

LPs receive their earnings directly in USDC, separate from their deposited assets. This ensures that the value of LP holdings reflects the price of wBTC and USDC, while returns function similarly to an index token with passive yield generation.

On Vela's Earn page, LP performance is displayed in two ways:

  1. 7-day rolling average APR – Shows the annualized return based on LP earnings over the past week.

  2. Daily APR (shown when hovering over) – Reflects the annualized return based on LP earnings from the previous day.

Risks of Providing Liquidity on Vela Trade

Providing liquidity comes with inherent risks that LPs should consider:

  • Trader Utilization Risk

    • LPs act as the counterparty to traders, effectively taking the other side of leveraged positions. While individual traders may profit in the short term, Vela's fee structure and pricing engine are designed to ensure long-term sustainability for LPs.

  • Asset Depreciation Risk

    • Since the VLP holds wBTC and USDC, the pool’s overall value fluctuates with the price of Bitcoin. If BTC appreciates, LPs gain; if BTC depreciates, LPs experience a decline in value.

  • Latency Risk

    • If price updates from Vela's oracle provider (Pyth) are delayed, traders could exploit arbitrage opportunities. To mitigate this, Vela actively monitors trader behavior and dynamically adjusts fees and spreads as needed.

  • Smart Contract Risk

    • As with any decentralized protocol, there is a risk of vulnerabilities in smart contract logic. Vela's contracts have undergone multiple audits to reduce the likelihood of exploits and ensure platform security.

By understanding these risks, LPs can make informed decisions when participating in Vela's liquidity ecosystem.

PreviousPool-to-Peer MechanismNextVLP Token

Last updated 15 days ago