# Providing Liquidity on Denaria

Canonical page: https://docs.denaria.finance/protocol-architecture/liquidity-providing/providing-liquidity-denaria

Status: current

### Providing Liquidity on Denaria
Liquidity Providers are a fundamental component of the Denaria perpetual DEX. LPs enable leverage trading by supplying the virtual assets that traders interact with when opening or closing positions. In return, LPs **receive protocol fees** and **may earn funding payments**, depending on market conditions and traders exposure.

Denaria has developed a **flexible and capital-efficient liquidity provisioning model** that, unlike traditional solutions, which require deposits in fixed ratios, allows LPs to provide liquidity in vAssets and vStable in personalized ratios.: **balanced, imbalanced, or even one-sided.**

# ![LP diagram](https://docs.denaria.finance/img/protocol%20Architecture/liquidityProviding/01_LP.png)

### **Depositing Liquidity**
On Denaria, providing liquidity starts with a simple step: the **LP deposits stablecoins.** The system then converts this deposit into balances of vAsset and vStable inside the chosen market. Each market (e.g., vETH/vUSD or vBTC/vUSD) has its **own dedicated pool,** and LPs can freely decide **how to split their collateral between vAsset and vStable in any ratio**, according to their strategy.

Based on the ratio chosen by the LP, the protocol issues **LP shares,** one for the vAsset side and one for the vStable side. [This dual-share accounting](https://docs.denaria.finance/protocol-whitepaper/#LP%20shares) system allows flexible strategies while ensuring that returns remain properly balanced between both assets. These shares determine each LP’s entitlement to:
*   The virtual assets in the pool,
*   Accumulated trading fees (collected in vStable),
*   Potential funding payments.
  
By supplying liquidity, LPs **passively take the opposite side** of trader positions, absorbing market exposure in exchange for a share of the protocol’s earnings. This mechanism ensures that trades can be executed with minimal slippage while offering LPs incentives to support the system.
### Imbalance Fees for Liquidity Providers
Denaria allows LPs to add liquidity in any ratio of **vAsset** and **vStable**, including one-sided deposits. While this flexibility enables customized risk strategies, it can also create **imbalanced pools**, where the asset ratio drifts away from the oracle price. Such imbalances increase slippage for traders and distort LP exposure.
To counter this, the protocol introduces **imbalance fees** on new deposits:
*   **Balanced contribution:** If the deposit brings the pool ratio closer to the market price, the LP pays only a minimal fee or even nothing. (`fmin`).
*   **Imbalanced contribution:** If the deposit worsens the imbalance, a higher penalty (`fmax`) applies.
The exact fee coefficient is determined by comparing the pool’s ratio before and after the deposit with the market price. This ensures that:
*   Deposits that **improve balance** are rewarded with near-zero penalties.
*   Deposits that **skew the pool further** are disincentivized through higher fees.

Importantly, these fees do **_not_** go to the protocol. Instead, they are distributed to existing LPs, compensating them for the additional risk created by imbalanced deposits.
The same logic also applies to **withdrawals**: if a withdrawal worsens the pool imbalance, the same type of fee is charged.
This mechanism ensures that LP incentives align with system health, maintaining **tight spreads and reducing the risk of extreme pool skew.**
### Share Accounting and Dynamic Tracking
To manage LP balances accurately, Denaria employs a dual-share accounting system. Each LP holds two share balances: one for vAsset and one for vStable. As trades occur and liquidity is used to back the trading activity, LP balances are dynamically updated using an efficient onchain algorithm.

This system allows a **fair distribution of fees and funding payments,** calculated according to the LP’s share of each asset in the pool. Fees collected in vStable are distributed proportionally to LPs based on their vStable shares.
LPs can withdraw their liquidity at **any time.** The withdrawal will be processed according to the LP’s current share distribution, which reflects both their original deposit and the net effects of trading activity.