🤖VLP’s stable mechanism
VLP, or vDEX Liquidity Pool, is a unique financial instrument that comprises an index of assets used for swaps, perpetual swaps, and dual investments (options). Being an index means that it is has lower volatility than most of its components. It is designed to be stabile through a combination of mechanisms, including minting and redemption, fee adjustments, and token weight adjustments.
Minting and Redemption: VLP can be minted using any index asset and burnt to redeem any index asset. The price for minting and redemption is calculated based on the total worth of assets in the index (including profits and losses of open positions) divided by the VLP supply. This mechanism ensures that the value of VLP is always tied to the underlying assets, providing a level of stability.
Fees: The fees associated with minting VLP, burning VLP, or executing swaps fluctuate depending on whether the action contributes to or detracts from the balance of assets. For instance, if the index has a high proportion of ETH and a minor portion of USDC, operations that increase the quantity of ETH within the index will be subjected to higher fees. Conversely, actions that decrease the quantity of ETH within the index will incur lower fees. This fee adjustment mechanism encourages balance in the asset composition of the index, which helps maintain the stability of VLP.
Token Weight Adjustments: token weights are adjusted to provide a hedging mechanism for VLP holders, considering the open positions of traders. For example, if a majority of traders have taken a long position on ETH, the token weight for ETH will increase. On the other hand, if many traders have taken a short position, a greater token weight will be allocated to stablecoins. These adjustments help to hedge against market volatility and maintain the stability of VLP.
Auto-Compounding: Holders of the VLP token earn 50% of platform trading fees in VLP and esVDX in staking page. After acquiring VLP, your tokens will be automatically staked, and you will begin earning VLP and Escrowed VDX. Every VLP reward will be automatically staked as well to achieve auto-compounding until you decide to cash out in the desired asset (swap from VLP). This auto-compounding feature helps to increase the value of VLP over time, providing a level of price stability.
Protocal Reserve: To mitigate the risks of volatility from smaller assets such as Uniswap in VLP (impermanent loss), vDEX offers a protocol reserve that consists of VLP worth 5%-15% of Total Value Locked (TVL). This protocol reserve is funded by the DAO Treasury and will be used to compensate users in case the value of users’ assets is lower than the VLP value as a backstop. This risk management strategy provides an additional layer of protection for VLP holders, further enhancing the stability of VLP.
In conclusion, the stability of VLP is maintained through a combination of mechanisms that encourage balance in the asset composition, hedge against market volatility, and provide a steady income stream for VLP holders. These mechanisms work together to ensure that VLP maintains its value, making it a stable and reliable financial instrument for users of the vDEX platform.
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