Providing Liquidity

The KTX.Finance Liquidity Pool ("KLP") is an integral part of the protocol that enables trade execution and settlement.

KTX.Finance Liquidity Pool Introduction

It is important to understand KLP's role in the protocol before describing the trading process.

KLP is an index consisting of 50% stablecoins and 50% digital assets. The allocation of assets varies depending on the network on which the protocol is active.

You can view live composite of the KLP Pool here

To compensate depositors, KTX allocates majority of the protocol fees to depositors along with other benefits (more details here)

Learn how to deposit liquidity into KLP here

Market Making with KLP

Depositors of KLP provide liquidity and acts as a market maker for perpetuals trading / spot swaps on KTX.Finance. As the counterparty to trades, the different sides of the pool caters to different directions of trading.

• Long Trades: On KTX.Finance, long trades, such as long BTC positions, are physically settled. Trade settlement occurs in the respective trading pair. Profits or losses from long positions are realized in the underlying asset itself.

Trade Example: Long BTC / USDT

Parameters:

• Entry Price: $10,000

• Collateral: 1 BTC

• Leverage: 50x

• Reserved Amount: 50 BTC

Upon execution of this trade, 50 BTC will be reserved from KLP. The following scenarios illustrate potential outcomes:

1. Exit Price = $10,100 (+1% price movement)

   • Profit Calculation: 1% * 50x = 50%

   • Result: The trader profits 50%, and 0.5 BTC from the Reserved Amount is paid out to the trader.

2. Exit Price = $9,900 (-1% price movement)

   • Loss Calculation: -1% * 50x = -50%

   • Result: The trader incurs a 50% loss, and 0.5 BTC will be added to the KLP pool.

• Short Trades: In contrast, short trades on KTX.Finance are cash settled. This implies that the settlement for short positions is in USDT.

Trade Example: Short BTC / USDT

Parameters:

• Entry Price: $10,000

• Collateral: 1,000 USDT

• Leverage: 50x

• Reserved Amount: 50,000 USDT

Upon execution of this trade, 50,000 USDT will be reserved from KLP. The following scenarios illustrate potential outcomes:

1. Exit Price = $9,900 (-1% price movement)

   • Profit Calculation: 1% * 50x = 50%

   • Result: The trader profits 50%, and 500 USDT from the Reserved Amount is paid out to the trader.

2. Exit Price = $10,100 (+1% price movement)

   • Loss Calculation: -1% * 50x = -50%

   • Result: The trader incurs a 50% loss, and 500 USDT will be added to the KLP pool.

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Risks & Mitigations

1. Asset Price Changes

LPs within the KLP pool are exposed to price movements in the underlying assets due to the pool's design.

The value of LPs' holdings are sensitive to fluctuations in the prices of the pool's assets, reflecting the inherent volatility in the cryptocurrency market. A decline in the prices of the underlying assets may result in a negative impact on LPs' holdings.

LPs inherently possess long exposure to the assets within the KLP pool by depositing into it. To mitigate and manage their exposure to asset price changes, LPs can short the relevant assets in their respective weightages within the pool. Creating a delta-neutral environment helps LPs balance their portfolio, offsetting the impact of price fluctuations in the underlying assets.

KTX is working with several institutional trading houses and protocols to provide LPs with strategies to achieve market neutral returns.

2. LPs Exposure to Trading Skew

As KLP assumes the role of the counterparty to trades on KTX, the pool's performance is inversely linked to the success of trading activity.

In strongly trending markets (bull/bear), where there may be a notable Open Interest (OI) skew, traders might unilaterally enter either long or short positions, especially in markets with a strong trend (e.g., a bull market where most traders prefer long positions).

You can view the live OI composite here

LPs can adopt a strategy that mirrors traders' trades. By doing so, LPs position themselves to profit in a similar manner to traders. This approach effectively hedges LPs against adverse Trader PnL movements. The risk management strategy creates a payment structure for LPs characterized by low risk and high return potential. This aligns with LPs' objectives to optimize returns while managing exposure to market dynamics.

Sophisticated hedging strategies for LPs are coming soon...