The Cap Liquidity Pool - CLP explained (EDIT - The CLP has been replaced with the Treasury), no more CLP

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.

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Thank you for this post, this really helps to sum up various points that were made through the various channels. Now of course many questions remain, and from what I understand nothing is yet set in stones, so here are a few of mine, trying to understand better how this works.

  • Will the CLP start from 0, or there be an initial funding (by the dev team or community for example), that would be retrieved once the CLP reaches a viable threshold?

  • What percentage of the CLP profits will be used for the bb&b, and on what timing schedule? 10, 20, 50%? Since the previous week/month, since the last buy back? My take on those last two questions would be “10%-20%”, and “since the last buy back” which would allow for a healthy CLP growth.

  • Subsequently, from my understanding, a growing CLP would naturally benefit protocol resilience, but will there be a hard cap on CLP value? If CLP was to reach (hypothetically) 1 trillion DAI, or a somewhat ridiculous amount considered “enough” or “mature” by the community, the protocol could begin turning 100% of CLP profits into bb&b, or perhaps at this point a combination of buy back and holder dividends in DAI.

  • Regarding buy back and burn, I believe it to be a very valid way to increase token value. But won’t it encourage passive holding, creating a lack of liquidity (e.g. on Uniswap), essentially making holders paper rich, but enable to move their stock?

Also, I must say I love the CLP protection mechanism. Super interesting, protecting the protocol while not brutalizing profitable traders.

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Hey, welcome to the forum, some great questions indeed. I will have to let one of the Dev’s maybe step in to answer. Please be patient.

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From Dev:
“The answer is governance can determine all of this. At the start the buyback percent will be 30% of the CLP per year, and can be increased or decreased easily by governance over time.

Regarding b&b and liquidity, keep in mind you can sell fractions of CAP up to 18 decimals. There can be a lot of liquidity even with a limited amount of full CAPs”

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these are really good questions, Rachel. Happy to have you on board.

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Thank you all for your answers and warm welcome.

Please note that I do not expect immediate answers, and that I understand that governance is at the heart of the project. Though, being a non-dev and frankly quite inexperienced in matters of shared crypto governance does make it a little difficult to keep up and see a clear path for the project. (You may argue that this is my problem, and throwing a “Learn to code” would be the appropriate millennial answer…)

In anyway, I hope CLP behavior can be discussed some more in the future, in an accessible manner like this thread.

Valid.

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Great, well it’s been a pleasure having such civil conversations. Keep them coming.

Cheers

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  1. I remember reading CAP can be redeemed for the value of CLP after mainnet. Does it still apply?

  2. Also, will I be able to get CAP by adding liquidity to CLP, instead of buying from another holder or uniswap?

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Both of those are now outdated. The CLP rewards are now indirectly distributed to Cap holders via buy back and burn off the open market. The only way to get Cap is to buy it, there will be no more staking or adding of liquidity.

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this question may merit its own thread - but it has to do with CLP so I’ll start here (I am also still exploring the WP and have yet to play around on testnet, so forgive me if the question would have been answered by doing so)

are there plans for users to be able to tokenize positions?

Edit: got an answer in the TG :slight_smile:

Another great tutorial video here would be on “How to Earn DAI as a Liquidator”