The Cap Liquidity Pool, referred to as the CLP, is the pool which backs trader profits and losses, and from which, excess funds are used to buy back and burn Cap tokens off the open market.
There have been some changes to how the CLP works from what was listed in the whitepaper, I will list some of what we do know here, to try to better provide clarity, and dispel some misconceptions that often come up because of the differences between the CLP, and what some may have seen in other projects, as well as some recent changes, not reflected in the whitepaper.
The CLP backs trader profits and losses, not their full positions, so in this respect, the CLP is automatically funded when people trade, there will be no direct adding to the CLP as a liquidity provider, and there will be no staking of coins. This is made possible, because functioning by design, the CLP will grow over time in pace with growth in trading volume.
Initially the CLP will be seeded (details to come later), after at which point the CLP will be funded when people use it to trade.There are several sources of funding for the CLP, the first one is the spread(difference between the buy and sell price) on trades. Effectively, an estimation of the CLP inflow can be deduced by approximation of the amount generated by trading activity in the total volume (x) the effective spread, and the second way is simply the revenue generated from the general underperformance of traders as a whole in numbers over time. There is also a daily funding rate for open positions.
In this fashion, the CLP, being a shared pool for all assets, is able to act as ‘the house’ in the sense that traders are trading essentially against the pool, being paid ‘profits from’, on execution of successful trades, and ‘paying to’, via the collateral or margin that was posted to enter the trade, either when they close a loosing trade, or by forced liquidation, which can be called by any observing third party with the know how.
Ok, so now the juicy part, how in the world do people benefit from the CLP then if there is no funding needed, and no staking or farming? Very easy. By simply holding Cap tokens. That’s it. No need for a second token, or having to worry about LP tokens. This is done by having the excess yields distributed indirectly to token holders by a called contract function that causes excess funds to be used to buy back and burn Cap tokens off the open market, thereby causing the scarcity and upwards price pressure on Cap’s token price, benefiting all Cap holders. Simply put, owning Cap represents a proportional share ownership in the CLP excess generated Yields. That simple.
There are mechanisms in place by design, which protect the CLP from being excessively drained at any one point in time. Although there exists possibilities of the CLP being stressed at times, the scenario will be mitigated over time, as the CLP will grow in size along with trading volume, allowing for a larger cushion. As well, there is in place a minimum CLP drawdown balance that is currently set at a default 10K. One mechanism that helps prevent CLP drainage, is the selection of the limit placed on certain assets, decided by governance (eg: 1M shares of AAPL). The importance of diversification also plays a role in the health of the CLP.
In the unlikely event the CLP is drained, it would only be temporary, and profit takers would simply have to wait to take full profits. (the trade will not execute until there are funds in the CLP), however, traders can opt to close their position without profit, and receive back their margin, as the clients margin is separate from the profit and loss, and will always be available for withdrawal even if the CLP is drained.
All parameters can be adjusted and changed by governance to allow for a dynamic relationship between protocol growth and the CLP. For example governance can add BTC at 10x leverage and 0.3% spread, to minimize drainage risk in the beginning. Governance can set and update the spread on each product. If a product becomes more volatile or too many traders are winning on it, governance can vote to increase the spread, or as the CLP grows, governance can increase leverage and decrease spread.