Providing Liquidity: How Ratio is adding utility to LP’s on Solana
One of the core features in the decentralized finance (DeFi) space is the ability to earn yield/interest by providing liquidity to decentralized exchanges, automated market makers, and other liquidity protocols. These liquidity providers are some of the most necessary participants in DeFi. The entire DeFi industry depends on liquidity providers in order to properly function.
On Solana, one of the only ways the ecosystem rewards these liquidity providers is by allowing them to earn yield when depositing collateral on Raydium. However, providing liquidity does not come without risk. One of the most glaring risks is that of impermanent loss.
Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet. It occurs when the price of tokens inside an AMM diverge in any direction. The more divergence, the greater the impermanent loss.
Why “impermanent”?
Because as long as the relative prices of tokens in the AMM return to their original state when you entered the AMM, the loss disappears and you earn 100% of the trading fees.
However, this is rarely the case. More often than not, impermanent loss becomes permanent, eating into your trade income or leaving you with negative returns (Bancor: Beginner’s Guide to Impermanent Loss).
Leveraging a user’s collateral to earn maximum yield
As it stands, users are very limited in the different ways they can earn yield on Solana. The ecosystem is very young, and while explosive growth and development across the board are taking place, in its current state, earning yield on a user’s collateral on Raydium is quite limited.
Users can earn RAY (Raydium’s token) and trading fees in exchange for providing liquidity to the pools with their capital and in return, receive a “LP” receipt token, which basically serves as proof that the collateral in the pool is theirs. There are also “fusion” pools, where users can earn tokens outside of just RAY. A few pools that currently offer these dual rewards are ALEPH-RAY, TULIP-RAY, COPE-RAY, MEDIA-RAY, and several others. This allows users to boost their yield by earning two types of tokens are rewards.
If a user wishes to remove their liquidity from a pool on Raydium, they must exchange the receipt token they received for their collateral. What if we could take this a step further, though?
Ratio aims to allow users to leverage their collateral to borrow USDr (Ratio’s collateralized debt position stablecoin), giving them access to new capital that otherwise would be inaccessible. So, what does this look like for the user?
Well, let’s say a user deposits their collateral on Ratio in order to earn yield in the form of RAY and trading fees. They can now take it a step further and deposit the LP receipt token into Ratio finance, in order to borrow against their position through Ratio to do whatever they wish. Users will be able to stake the USDr borrowed in our vaults, allowing them to continue to earn on their collateral in Raydium while also earning yield in the Ratio vaults.
We take this a step further and have implemented a protocol that allows users to automatically pay back the debt on their loans from minting USDr with their LP receipt tokens.
How does this work? Well, the short answer is that when users deposit their LP tokens into our vaults, we are able to take the yield generated from their original positions and use it to pay off the balance of their loan over time. This means that over time, the overall debt on a position will decrease while they continue to earn interest in our vaults. We protect our users by changing the amount of USDr that can be minted based on the underlying risk of the respective LP being used as collateral. This means that all of our users can clearly visualize the risks that they are taking depending on which LP they wish to gain leverage on. We’re pretty excited about the potential that this unlocks for our users, and we think they will be too.
However, this feature is opt-in. This means that if our users don’t want to have their debt paid off for them, they can instead take the yield being generated in our vaults and use it to mint even more USDr to leverage their positions to their maximum potential. This unlocks many more possibilities for users to make sure that their capital is working for them.
Rewarding our users
Making sure that there is enough liquidity for trading to take place is an essential part of the DeFi ecosystem. It is our goal to ensure that users are making informed decisions and rewarded appropriately for facilitating this process. As we strive to help secure the future growth of not only the Solana ecosystem but DeFi as a whole, we look forward to exploring all the possible ways we can allow users to easily leverage their assets to their maximum potential, should they choose. We’re just getting started, so make sure to subscribe to our social media channels to stay up to date on everything we’re working on. Stay tuned.
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