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Introducing LP Vaults

Liquidity vaults


As noted in the dYdX 2024 Product Roadmap, one of the key pillars of launching permissionless markets is LP Vaults.

LP Vaults enable anyone to provide automated liquidity strategies on protocols using dYdX software by simply depositing USDC into a LP Vault. That USDC is then pooled with all other USDC that was deposited into that market’s vault and subsequently used to automatically provision liquidity on both sides of the book in a decentralized and non-custodial manner. 

LP Vaults will be available for any cross or isolated market available on protocols using dYdX software, but is especially useful for newer markets that likely have limited liquidity. The launch of LP Vaults will enable the addition of standing liquidity on any market. 

LP Vault Strategy and Functionality

The general goal of each LP Vault is to provide liquidity at all times while being economically viable over long periods of time. LP Vaults aim to have zero net exposure on each market, and deterministically adjust their quoting strategies to attempt to get back to neutral positioning (zero open interest). Vault strategies are fully defined on-chain, and have governance-controllable parameters, which can be used to adjust certain variables of the strategy. 

Vaults pass on any profits (and losses) to depositors, along with any maker fee rebates or trading rewards generated by the vault’s trades.

For vaults to be sustainable, then, they must offer market-competitive yields to depositors.   

Phased Rollout 

LP Vaults will likely be deployed to the dYdX Chain open source software in phases.  

Phase 1:

  • An experimental version of LP Vaults that is deployed at a protocol level (via a new module,“x/vault”) with no accompanying front-end

  • Will support deposits only. Withdrawals will not be enabled until Phase 2

  • One vault available per market. Each vault is activated (starts quoting) once its first deposit is sent

  • Governance controllable parameters that apply to all vaults across the protocol

  • Timing: to be included in dYdX Chain Release 5.0.0

Phase 2 adds:

  • Ability for depositors to withdraw from each LP Vault

  • Front-end functionality

  • Updated quoting strategies

  • Unique trading privileges given to LP Vaults

  • Timing: to be included in dYdX Chain Release 6.0.0

*Given LP Vaults are in active development, all of the above is subject to change 


Who should deposit into LP Vaults during Phase 1? 

Given LP Vaults, especially in Phase 1, are highly experimental, dYdX Trading advises that any deposits into them be limited in volume and limited to protocol community funds. Phase 1 will give protocols using the software a chance to evaluate the vaults’ strategy and make updates as needed in preparation for Phase 2. 

It is not recommended that any other users deposit into LP Vaults during Phase 1. 

How do traders deposit into a LP Vault?

During Phase 1, traders manually deposit USDC to a module account (unique to each market). That USDC is then accounted for via shares. During Phase 1, shares can be tracked by querying the vault’s state on-chain. 

What are the risks involved with LP Vaults? 

LP Vaults actively trade and take positions, and their value will fluctuate based on market conditions. Therefore, they have the risk of losing some or all of the USDC deposited. Phase 1 does not support withdrawals from LP Vaults, so depositors must be aware that their assets may not be withdrawn until Phase 2. LP Vaults will be treated the same as all other traders during Phase 1, including being exposed to potential liquidation. 

Depositors should carefully understand the risks involved before depositing. 

Are LP Vaults an experiment? 

Yes, LP Vaults are highly experimental, especially in Phase 1. It is highly likely that various optimizations need to be built in Phase 2 and beyond.

Where can I find more technical information on vaults? 

Stay tuned for more technical information on LP Vaults to be published at docs.dydx.exchange

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