LP Structure

This section of the whitepaper describes the Liquidity Providers structure

On Vigoss, LPs are the liquidity providers; however, since Vigoss adopts the VAAMM architecture, only USDT is required instead of a token pair.

Single asset staking for liquidity

The provided USDT will be converted into vUSDT. One part of the vUSDT is injected into the VAAMM pool; the second part of vUSDT is converted (staking and minting) into the corresponding token pair, e.g. vETH, and then injected into the vAMM pool to fully create a virtual pair.

LP Risk Warning and Withdrawal Conditions

As shown in the figure above, when an LP withdraws its liquidity, if the amount of vETH withdrawn is less than the amount of previously staked assets, Vigoss will automatically use part of the withdrawn vUSDT to purchase vETH in vAMM to make up the minted amount. However, if the vUSDT withdrawn at this time cannot make up the difference of vETH, then LP will not be able to withdraw liquidity. LP will undertake the risk of impermanent loss.

To protect users and ensure sufficient liquidity in the VAAMM fund pool to allow users to close their positions, Vigoss will limit the large-scale withdrawal of LPs to a certain extent.

When the LP withdraws liquidity, and the sum of the current long positions held by all traders is Slong and the sum of the short positions held by all traders is Sshort , the following condition must be met: the amount of vETH remaining in the VAAMM after the withdrawal must be larger than max(Slong , Sshort).

Notice: under normal market conditions, if LPs are sufficiently dispersed, then the above restrictions on LPs will not be triggered. However, when vAMM's LP is too concentrated, then LP will face the risk of not being able to completely withdraw its liquidity.

Example:

Suppose there is 10,000 vETH and 20,000,000 vUSDT in the vAMM pool. The unit price of vETH/vUSDT in vAMM is 2,000.

Alice decides to provide 400,000 USDT as LP, then her 400,000 USDT will be exchanged into two parts of vUSDT. One part (200,000 vUSDT) will be directly injected into the vAMM pool, while the other part (200,000 vUSDT) will be used to convert into vETH at the price in the vAMM. Bese on the example’s assumption, Alice’s 200,000 vUSDT are converted into 100 vETH and then injected into the VAAMM pool. After Alice provides liquidity, there is 10,100 vETH and 20,200,000 vUSDT in the VAAMM pool and the liquidity provided by Alice accounts for 1/101=0.990099% for the whole VAMM pool.

After Alice provided liquidity, all traders added 500 long positions and 300 short positions in total. Assuming that there no new LP enters during this period, then there are 9,900 vETH and 20,608,080.808081 vUSDT in the VAAMM pool (the unit price of vETH/vUSD in vAMM is 2,081.624324).

Afterwards, Alice intends to completely withdraw her liquidity and Vigoss calculate the number of USDT that Alice can claim: First, because of the liquidity provided by Alice occupies 1/101=0.990099% of the whole vAMM pool, she can withdraw 98.019802 vETH and 204,040.404040 vUSDT. When Alices claims her liquidity, there are still 9801.980198 vETH and 20,404,040.404040 vUSDT in the vAMM pool. Because the withdrawn vETH is less than the minted 100 vETH, Vigoss will automatically use the 4,122.861266 vUSDT of the vUSDT withdrawn by Alice to purchase 1.980198 vETH in the VAAMM.

In the end, Alice can get 204,040.404040-4,122.861266+200,000=399,917.542774 USDT (as well as the handling fee and funding fee earned during the liquidity period).