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Strategy Explanation

Liquidity Strategies​

Denaria’s protocol lets LPs deposit liquidity in any ratio of vAsset and vStable, including imbalanced or one-sided deposits. This flexibility allows LPs to structure their initial setup according to their market predictions and risk appetite.

In this context, exposure refers to the market direction that an LP passively takes through the liquidity they provide. Because LPs always stand on the opposite side of trader positions, the way they split deposits determines whether they benefit more from price increases, price decreases, or remain neutral.

  • Only vAsset deposited (100% vAsset / 0% vStable) → The LP mainly provides liquidity for traders going long. They become the counterparty to those longs and are therefore passively exposed to a price decline in the asset (short exposure).
  • Only vStable deposited (0% vAsset / 100% vStable) → The LP mainly provides liquidity for traders going short. They become the counterparty to those shorts and are therefore passively exposed to a price increase in the asset (long exposure).
  • Balanced deposit (50% vAsset / 50% vStable) → The LP starts with a neutral position, providing liquidity in both directions. This setup reduces directional risk and lets the LP earn fees from both long and short activity.
  • Imbalanced deposit (e.g., 70% vAsset / 30% vStable) → The LP tilts their setup toward short exposure but still keeps some long exposure. This type of allocation lets LPs express a directional view (bearish in this case) while not going fully one-sided.

By adjusting the ratio of vAsset to vStable, LPs can fine-tune their position, from strongly directional to neutral, depending on their market outlook and risk appetite.

This design allows LPs to define their initial exposure through the chosen deposit composition. However, since trader activity continuously affects the pool's balance, LPs do not retain full control over their exposure, which will shift over time based on market dynamics. LPs can always withdraw and rebalance their position if they wish to adjust their liquidity setup.

LP diagram

Long Strategy​

An LP with long exposure primarily benefits when the protocol experiences higher short-side trading volume, since most of the protocol fees (the main LP incentive) will be paid by traders opening short positions.

This setup occurs when the LP provides mainly vStable (0%–30% vAsset / 70%–100% vStable). When traders short, they sell vAsset into the pool, increasing its reserves and generating more protocol fees for LPs.

At the price level, a long-exposed LP gains when the underlying asset appreciates, as the value of the vAsset reserves grows. Conversely, price declines reduce the LP’s notional value.

Long exposure is thus rewarded in environments dominated by shorts; both through protocol fees and, when applicable, via positive funding payments from short traders.

Short Strategy​

An LP with short exposure is rewarded when the protocol sees stronger long-side trading volume, since most protocol fees are collected from traders opening long positions.

This configuration occurs when the LP mainly provides vAsset (70%–100% vAsset / 0%–30% vStable). When traders go long, they buy vAsset from the pool, reducing its reserves and paying fees to the LPs. At the price level, a short-exposed LP profits when the asset price declines, since the pool can later repurchase vAsset at lower prices.

Short exposure is therefore favored when the market is long-biased, benefiting from fee flow and, if funding is positive, receiving funding from the long side.

Balanced Strategy​

A balanced LP (around 50% vAsset / 50% vStable) starts in a delta-neutral state. The LP earns fees from both long and short trades, and its position value is less affected by directional market moves. While neutral exposure minimizes price risk, the pool composition will evolve as traders interact, meaning that LP exposure will drift over time. Continuous monitoring and periodic rebalancing can maintain neutrality.