Market maker pools

An overview of the liquidity staking for market makers


Liquidity is a core component of any successful exchange. To promote liquidity network effects and incentivise professional liquidity providers, Equilibrium launches market maker pool where users may stake EQD stablecoin (and potentially others, including LP tokens from Curve stablecoin pools) and earn rewards for doing so. Governance-approved market makers may then use this liquidity to make markets on the Equilibrium DEX.

Why do we need MM pools?

Liquidity is a crucial part of any exchange that attracts active traders. Though, its depth and tiny spreads provided by market makers to an order book require quite a bit of inventory. We are solving this chicken or egg problem by incentivising liquidity providers who got used to having DeFi-like incomes to put their funds into dedicated market maker pools.

How will liquidity providers benefit?

Similarly to regular DeFi protocols, liquidity providers don’t need to take any actions and will receive a passive income on their stakes in Equilibrium MM pools.

Here is how this income will be generated:

  • Our liquidity farming program offers staking rewards in our native tokens.

  • Market makers will be sharing up to 50% of their trading profits with the pools eventually.

Mechanics for market makers

The flow for market makers will be as follows:

  • Market makers will be subject to a revolving credit agreement with liquidity (margin) providers.

  • Market maker accounts can borrow EQD and other stablecoins from MM pools.

  • Market makers place orders to the order book and make markets in different assets with EQD as the quote currency.

  • Market makers borrow base assets (e.g. BTC) directly from lending pools when their sell orders get filled.

  • If withdrawals from the pool are higher in magnitude than what’s left un-borrowed from the pool, market makers are required to repay assets back to the pool at the end of the next epoch.

  • Failure to return funds results in default and possible liability (debt in EQD stablecoins) on the MM account in the amount of the shortfall. Defaulted market makers are restricted from further borrowing from any of the pools until the liability is covered in full.

We expect MM pool to become a robust instrument to facilitate user activity on our order book DEX. We are planning to run liquidity bootstrapping events to raise initial funding for the pool. These events will offer additional bonuses for their participants on top of regular staking rewards.

Market maker incentives

Designated market makers will be acting in favour of liquidity providers by borrowing liquidity from MM pools and placing orders to the order book. These entities will be reputable and known trading companies with an extensive track record. Their access to liquidity will be free of charge and we will be even rewarding them for active trading with our native tokens.

Market makers are eligible for volume rewards if they generate over 5% of trading volume on the exchange and comply with the following parameters of order book maintenance:

  • spread is less than 2%,

  • more than 20 orders booked on each side,

  • more than 5,000 EQD booked at 5% spread,

  • more than 20,000 EQD booked at 10% spread,

  • more than 50,000 EQD booked at 20% spread.

Volume rewards will be distributed in native tokens proportionally to overall market volume for all market makers across the platform

Staking and unstaking in MM pool

The following operations are available for stakers:

  • Deposit EQD into the corresponding pool.

  • Request withdrawal of EQD from the corresponding pool.

  • Withdraw EQD requested for withdrawal at the end of the next epoch.

Accounting will be done once per epoch (1 Equilibrium epoch = 28 days). Liquidity providers can submit a withdrawal request at any time within the current epoch. They will receive funds at the end of the next epoch. Funds requested for withdrawal do not earn rewards. The following example clarifies this mechanic:

Staking risks

Market makers borrowing stablecoins from the liquidity staking pool cannot move borrowed funds outside of the protocol. But still, staked assets could be lost if a market maker were to lose funds due to unprofitable trading and be unable to replenish its borrowed allocations.

In this case, staker’s funds may be subject to socialised losses: the number of funds lost will be split among all withdrawing users pro-rata their withdraw amounts.

In case of a default, the market maker loses the ability to borrow additional funds from the pool he defaulted on and may be a subject to liability in a form of EQD stablecoin debt to compensate liquidity providers.

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