Everything You Need to Know About CVI: Chapter 3 — Providing Liquidity on CVI
As we are getting closer to the CVI trading platform launch on MainNet, we’ll be releasing a series of articles and guides over the next few weeks, detailing the CVI index and trading platform. In the following article, we’ll explain how to provide liquidity to the platform, and we’ll present the most common strategy for liquidity providing.
Liquidity providers on CVI play a much bigger role compared to their role when they simply provide liquidity to swap platforms like Uniswap or Balancer.
In fact, liquidity providers on CVI play the role of the counterpart for every trade made on the platform. Currently, only liquidity providers can take SHORT positions in CVI.
So, if a trader has bought a LONG on CVI and lost that trade, the liquidity providers are the ones to recoup the lost trade, and vice versa. In other words, if a trader bought insurance against volatility or against stagnation, the liquidity providers play the role of the insurance company. This is a great position to be in as it is much more lucrative than just providing liquidity for a small fee and being at risk of impermanent loss. With CVI, liquidity providers make excellent fees AND see their liquidity pool grow over time making their projected APY far greater than what it is on other platforms that just share trading fees for liquidity provisioning.
And the traders? They are usually fine with losing their trade as it served as a hedge (the same way they would prefer to pay a home insurance premium than having their house burn down…)
CVI will be launched with support for trades and deposits with ETH and USDT and will rapidly grow to support other tokens. $GOVI token holders will play a critical role in determining the new tokens introduced to the platform.
On the trading platform, liquidity providers supply X amount of ETH to the Liquidity Pool (LP). This ETH supplied to the LP enables it to mint new CVI points according to demand by buyers as long as Cr (Cr is the overall collateral ratio) > CrMin (Minimum required collateral threshold). Each liquidity provider on the platform shares the ongoing profits from fees according to their share in the liquidity pool.
In addition to ongoing profits, the liquidity providers will also share the distribution of $GOVI tokens. In order for new CVI tokens to be minted, it is required that 1 ETH will be added to the pool. Each CVI bought by traders in the platform decreases the Cr rate which, as a result, raises the funding fee and thus incentivizing more liquidity providers to enter the pool. The overall P&L in the system = index movement P&L + funding fee payment. The funding fee payment is dependent on (time, $GOVI value, collateral value) so the LP size affects the funding fee paid on the platform.
What to expect when the market goes up or down?
- In case of the CVI the more important indicator is whether the market is volatile \ stagnated rather than in which direction it is heading. As long as the trend is stagnated or relatively calm, which is based on historical data the majority of the time the CVI itself will head down until either stabilizing to an average value or jump back up due to a temporary rise in instability.
- Based on the utilization of the platform and the performance of the traders side, the gains and losses will be reflected in the value of the liquidity providers’ tokens.
Back slope — speculative strategy
As demonstrated in the previous examples, after a sharp surge CVI usually goes down to its average levels. If someone (in the current version it is possible for liquidity providers only) sells CVI at such a slope, it will bring a profit once the index is going down. Like all speculative trades, this strategy is more sophisticated and requires more analysis, but on average it can be profitable.
Expected results from rewards, premiums and fees
In addition to the change in the CVI index which is reflected in the matching value of the covered positions placed by traders and covered by the liquidity providers there are additional elements relevant to the liquidity providers.
Fees that go to the liquidity providers side include both the one time buying premium and the ongoing funding fees:
- Buying premium comes into play when either the system utilization ratio (percentage from the maximum capacity of the system used to cover open positions) is high, or when a turbulent (sudden increased volatility of the CVI index) period is identified.
- Ongoing fees (funding fees) paid by the traders over time based on the CVI index value. The lower the CVI index is (the potential for gain by the trader is higher) the higher sid fee is.
General fees such as the open \ close positions and deposit \ withdraw liquidity are collected into the fees pool, which is to be distributed between the stakers.
In addition there will be as part of the rewards additional $GOVI tokens to be rewarded based on a predefined plan.
How can I become a liquidity provider?
- Connect your Metamask or connect with WalletConnect → go to “Platform”
2. Click on “Manage your liquidity” on the top menu
3. select the currency you want to deposit → insert the amount you wish to deposit
4. Click on “Deposit”
Liquidity providers also earn a share of the pool premiums based on the amount of liquidity they provide and the time their liquidity stays in the pool. You can claim those premiums in the “Manage your liquidity”-> Claim tab.
Once you deposit liquidity you will get a LP token that you can stake in the “Manage your tokens” → Stake tab to earn CVI tokens rewards
For previous articles in the series, visit here: