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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.
To compensate the depositors of the BLP vault for providing market-making liquidity, Buffer allocates the majority of the protocol fees to these users along with other benefits (more details here).
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:
Vault | Base Asset |
|---|---|
uBLP | USDC |
aBLP | ARB |
- 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:
Parameters | Value | Description |
|---|---|---|
Max Utilization % | 40% | Buffer reserves the liquidity in BLP to be paid as profits to traders. There is a maximum utilization for BLP, beyond which new positions are not allowed to be opened (traders are still allowed to reduce their OIs). This parameter is in place to ensure some liquidity is always available for LPs to withdraw. |
Max Utilization per asset % | 2-3% | %age of the total available liquidity (depending on the asset) |
Max Utilization per trade % | 0.25% | 0.25% of the available liquidity |
Max Deposit Limit | 10M | The maximum amount of liquidity that can be provided to the uBLP and aBLP vault at any given time. |
Last modified 1mo ago