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LPs Risks

Liquidity Providers supply stable assets to the protocol vaults to enable trading activity on Denaria's specific perpetual markets. By depositing liquidity, LPs earn a share of protocol fees generated by traders’ positions. LPs effectively act as counterparties to traders, their return depends also on traders’ aggregated performance and market activity. Each trading pair (market) has its own Vault where LPs can deposit a supported stablecoin. The Vault serves as the liquidity pool for the perpetual AMM, providing collateral for traders’ positions and enabling leveraged trading activity. After defining the amount of collateral to deposit, each LP can choose a liquidity provisioning strategy, deciding the preferred ratio between virtual asset and virtual stable exposure according to their market expectations.

  1. Market PnL Exposure: LPs collectively act as counterparties to traders.If traders are profitable overall, LPs may experience losses. Conversely, if traders are unprofitable, LPs capture those losses as profits. In the Denaria protocol, LPs are not directly exposed to asset price movements unless they passively assume exposure through their chosen liquidity composition (ratio between virtual asset and virtual stable) and traders' activities
  2. Funding Rate Imbalance: Although the Funding Rate mechanism is designed so that traders pay FR and LPs receive it, some LPs may end up paying funding if their exposure aligns with the side that is paying at that moment. Funding Rate income therefore depends on market imbalance and the LP’s current exposure.
  3. Liquidation Risk: Each LP position carries market exposure and can be liquidated, similar to trader positions. If the Margin Ratio falls below the Maintenance Margin, the LP position may be liquidated following the same rules applied to trader accounts. Higher LP position leverage increases the potential return but also the probability of liquidation. Unbalanced liquidity positions (e.g. with a high ratio of virtual stable or virtual asset) are more likely to gain directional exposure that, under adverse market conditions, could trigger liquidation.
  4. Imbalance fees: When providing or withdrawing virtual liquidity, LPs may incur imbalance fees if their action disrupts the pool equilibrium, meaning the internal pool price diverges from the oracle price. These fees are applied both on deposit and withdrawal if the operation increases the imbalance. Therefore, depending on market conditions, liquidity positions may pay additional fees at entry or exit.

Important Notes​

  • Liquidity provision is not a risk-free activity.
  • Returns are variable and depend on market conditions and trader behavior.
  • The protocol operates in a fully permissionless and non-custodial manner; users remain in full control of their wallets.
  • Past performance does not guarantee future results.