📊LP Pool Rebalancing
Liquidity limits
Restrictions for liquidity providers apply when attempting to contribute liquidity to LP pools. Naturally, liquidity providers will be exposed to price risk of wBTC and ETH. As liquidity providers buy DLP tokens, the weightings will change along with the price of DLP tokens.
To limit price risk of the tokens, each liquidity pools have an aggregated target ratio of wBTC, ETH and USDC as below:
| Asset | Weight | Target | Utilization |
|---|---|---|---|
wBTC | NA | 29% | NA |
ETH | NA | 26% | NA |
USDC | NA | 45% | NA |
The weightings in Snr, Mezz, Jnr DLP will differ time to time but swap fees will adjust to reach the target ratio. The target ratio may also be adjusted by DIP DAO.
Most decentralized exchanges (DEXs) allow users to deposit tokens even when the token weight exceeds the target weight. This is done to provide users with flexibility and to avoid creating artificial scarcity of tokens. However, DIP Exchange use a few methods to balance token weights in liquidity pools.
One method is to modify the mint/burn (i.e., deposit/withdrawal) fees of the liquidity provider (LP). When the weight of a token exceeds the target weight, the fee rate is increased for depositing that token. Conversely, the fee rate is decreased for withdrawing that token. This encourages users to withdraw excess tokens from the pool and to deposit tokens that are below the target weight.
Another method is to modify the swap fee of the target token. When the weight of a token exceeds the target weight, the swap fee is decreased for swapping that token with other tokens. Conversely, the swap fee is increased for swapping other tokens for that token. This encourages users to swap tokens that are above the target weight and to avoid swapping tokens that are below the target weight.
Finally, DEXs can also use a decentralized autonomous organization (DAO) to adjust the target weight of a token. This can be done if the DAO believes that the current target weight is not optimal. For example, if the DAO believes that the target weight of ETH is too high, it can vote to decrease the target weight.
These are just a few of the methods that DEXs use to balance token weights in liquidity pools. By using these methods, DEXs can ensure that token weights are kept in check and that liquidity is available for all users.
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