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Market Making Vault (BLP)
Below are the topics that we will be covering in this section:
The Buffer liquidity pools (BLP) provide market-making liquidity for exotic options trading. It works by locking up a certain amount of liquidity at the time of option buying, which is then used to pay out profits for in-the-money (ITM) options at the time of expiry.
When an option is bought, a dynamic settlement fee (based on trading volume and payout) charged is sent to the pool, and the pool locks up the corresponding liquidity.
- When traders win (positive PnL), their winnings are received from the vault.
- When traders lose (negative PnL), their losses are sent to the vault.
In exchange, the vault receives a portion of trading fees. These fees are proportionally split among Liquidity providers and BFR stakers incentivizing stakers to stay in the vault.
Multiple pools are available for trading depending on the selected markets. Trades can be placed in a non-custodial manner, allowing traders to remain in the custody of their assets even a trade is open.
Buffer currently hosts two BLP vaults on Arbitrum:
- USDC-based BLP (uBLP): earns 55% of platform fees distributed in USDC
- ARB-based BLP (aBLP): earns 70% of the platform fees distributed in ARB (via monthly airdrops)
- Dynamic Pricing Mechanism
Buffer employs a "Dynamic Pricing" mechanism to incentivize or penalize traders, with the aim of maintaining balance in the Open Interest (OI) across various markets and promoting diversification among traders. This mechanism is intricately designed to impose higher fees during periods of market volatility. The fee is applicable to all trades and dynamically scales, influenced by trading volume, and payouts. It adds positive expectancy to the platform, thereby improving the possible outcome for LPs.
Additional parameters besides the adaptive pricing mechanism implemented to manage risk associated with long tails events for liquidity providers: