Providing Liquidity

With most regular AMMs like Uniswap, adding liquidity requires investors to possess all assets traded by their chosen pool. With CompliFi, each pool holds a single type of external asset, and derivatives it issues are "synthetic" - created within the protocol using investors' liquidity as collateral. As a result, CompliFi investors never have to handle derivative positions directly. This arrangement has a number of implications on how liquidity operations work.

At any given time, the value of a pool's assets is comprised of free liquidity (investor's funds not currently backing any derivatives) and a set of derivative positions arising from the pool's role as trading counterparty. Each pool investor has a claim to a share of the combined value, proportional to the number of pool share (LP) tokens they hold.

LP token value is defined as USD value of the pool divided by the number of LP tokens outstading. When liquidity is added, the pool issues investors with newly minted LP tokens in an amount that leaves LP token value unchanged.

When an investor withdraws liquidity, one of two things happens:

  1. If the amount due to investor is less than or equal to the amount of free liquidity in the pool, then the request is satisfied immediately.

  2. If the pool does not have sufficient free liquidity, it will pay out whatever is available immediately and place the remainder in a queue. Queued requests are then processed automatically when additional collateral becomes free, e.g. when derivatives settle/roll over, or traders sell their positions.

In all situations, investors have the first claim on free collateral - no new derivatives can be issued until the exit queue is clear. The longest possible period an investor could have to wait for their liquidity equals the duration of the longest derivative in the pool (for perpetuals, it is the time between rollovers). At the time of writing, for the USDC Leveraged Strategies pool this period is 24h. For the Options Strategies pools, this period is up to 2 weeks.

It is important to keep in mind that queued liquidity still bears the pool's risk.

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