What the hell is Recycled Liquidity?

4 min readJul 18, 2022

TL;DR

Rage Trade differs from other on-chain perpetuals in a few ways:

It matches orders via a UNI v3 vAMM
All platform liquidity comes from Rage’s natively supported LP Vaults
Rage creates deep liquidity by recycling other LP tokens

Rage’s UNI v3 vAMM enables greater LP capital efficiency, higher sustainable LP yields, and decreased trading slippage. We expect our Recycled Liquidity Vaults to provide competitive >20% APYs in the long term, and set a new capital efficiency standard for modular on-chain LP strategies.

So what does recycling LP tokens mean?

Currently, LPs can only deploy capital in one exchange at a time.

For LPs today to provide liquidity in two places at once, they must borrow against their LP tokens and redeploy those borrowed assets. However, these borrow/lend markets have not yet become mainstream.

Rage takes an alternative approach towards creating liquidity with yield-generating liquidity positions by natively accepting them as collateral in our system. We call this practice of pricing LP tokens and integrating them into distinct LP vaults recycling liquidity.

How does depositing work?

To process a deposit, the vault

Moves the user’s LP tokens in the Rage vault margin account
Deploys about 20% of the notional value as concentrated liquidity on Rage
Sends the user ERC-20 vault ownership tokens

How do withdrawals work?

To process a withdrawal, the vault

Removes the Rage liquidity & converts the Rage PnL into native LP tokens
Returns the original deposit + proportional PnL to the user
Burns the user’s ERC-20 ownership tokens

How does the vault manage its liquidity positions?

Every day, the vault rebalances and:

Withdraws the LP position from Rage
Deposits Rage profits or withdraws losses into/from Curve TriCrypto
Redeploys as 50/50 concentrated liquidity around the new price

How does divergence loss work in Rage?

As the ETH price increases, the vault’s Rage LP position becomes more USD than ETH (and vise-versa).

This means that if

Price goes up → vault becomes short ETH perps
Price goes down → vault becomes long ETH perps

Essentially, the further the price deviates, the larger the accumulated perp position (and vise-versa). As a result, LPs experience the same divergence loss profile as Uniswap v3 concentrated ranges. To better understand divergence loss in Uni v3, check out their docs.

How do ‘resets’ mitigate divergence loss?

If the vault’s accumulated perp position becomes > 20% of the vault’s USD value, the vault ‘resets’ and:

Slowly offloads the position (minimizing slippage)
Recalculates the value of the vault
Redeploys 20% of the vault’s new value as Rage liquidity

The ‘reset’ limits the amount of capital at risk of divergence loss to around 20% of the vault’s TVL.

Why are they called “80–20” vaults?

We dubbed this vault the “80–20” strategy because

80% of deposited LP tokens function as excess collateral
20% fully back the amount deployed into concentrated liquidity on Rage.

How did TriCrypto vault perform historically?

To better understand the strategy’s historical performance, we ran extensive backtests. See the graph below showing how the TriCrypto vault performed vs UNI v2 from 2019 to 2022. It closely tracked a Uniswap v2 payoff with increased yield.

Even during intense drawdowns, the strategy holds up well against UNI v2:

For more detail, see our open source Python backtesting codebase.

How does the vault replicate UNI v2 using UNI v3?

As the price marker moves in the gif below, the concentrated liquidity range ‘rebalances’ around the price marker daily.

In addition to frequent rebalances, ‘resets’ ensure that at most 20% of the vault’s TVL remains at risk of divergence loss on Rage. All the while, the recycled collateral earns steady yield in Curve.

This combination of rebalances and resets leverages UNI v3’s concentrated liquidity to closely replicate a v2 payoff with greater capital efficiency and higher yield.