📊Market Making Vault

Extends liquidity to traders. The Vault is designed to cover positive PnL trades if the Liquidity Buffer is depleted and in return receives a share of protocol fees.

Ostium's trading engine is designed to minimize net trader directional exposure and the Liquidity Buffer to absorb such exposure if and when it occurs. However, in the early stages of the protocol (before any incidence of sustained trader losses has the chance to accrue to the Buffer) and in the event of positive trader PnL, the LP Market Making Vault extends this liquidity debts.

LPs deposit their capital in the LP MM Vault to mint OLP tokens, representing their share in the Vault. Moreover, they receive rewards from trading fees for incurring the risk of potential delta exposure.

LPs deposit capital in the LP MM Vault, extending protocol liquidity. In return, they are rewarded with a share of trading and liquidation fees.

Trading Fee Rewards

Market Making Vault depositors are rewarded with a share of trading fees:

• Opening Fee: 100% of opening fees collected

• Liquidation Rewards: 100% of liquidation rewards (10% of liquidated trader collateral)

For a limited time beginning Oct 3rd, 2024, 100% of opening fees are directed to the Market Making Vault.

While the total percentage of collected fees this represents varies as a function of the average size of the opening fee relative to other fees, depositors can expect to earn 70-100% of all fees collected by the protocol.

LP fee returns scale with the implied risks they face. Should the opening fee and funding fee work effectively to incentivize balanced trades and optimal OI utilization, total opening fees collected would decline relative to another revenue source like liquidation rewards, which do not vary as a function of imbalance. The inverse is also true (greater risk leads to higher fees leads to higher LP rewards).

OLP (Ostium Liquidity Provider) Token

LPs participate in the LP MM Vault by depositing USDC and receiving fungible OLP tokens. These tokens represent their share in the pool, acting as proof of ownership and the right to a portion of the vault's assets and earnings. Trading fee rewards are accrued directly into the value of the OLP token, which increases over time should rewards exceed any losses from MM settlement.

Deposits can also be locked for a period of up to 365 days. Locked deposits receive a Lock Boost, receiving a greater share of OLP tokens for the same number of USDC tokens deposited, and thus a greater proportion of trading fees. Lock boosts depend on vault collateralization (more details here) and scale with locking period relative to 365 days: e.g., if the 1-year lock boost is 5%, a 6-month lock will yield a 2.5% boost.

LPs and Counterparty Risk

A crucial aspect of the LP MM Vault is that LPs are not the immediate counterparties to traders, meaning they aren't exposed by default to individual trade outcomes (which is the role of Liquidity Buffer). Instead, they act as counterparties if and only if the Liquidity Buffer's funds are insufficient to cover trader gains.

Collateralization Ratio

The collateralization ratio identifies whether the buffer is depleted or not. The vault has two states:

• overcollateralized: ratio >= 100% -> buffer settles traders' gains, LPs collect X % of the opening fee and liquidation rewards

• undercollateralized: ratio < 100% -> LPs settle traders' gains & losses and collect 100% of the opening fees, liquidation rewards, and rollover fee

Ostium's collateral ratio is defined differently from the traditional loan collateral ratio commonly used in TradFi. Instead of evaluating your LP profitability, this ratio determines whether a buffer exists. To assess profitability, LPs must consider the OLP price variation.