Liquidity Pools

When a new leveraged long trade opens, the corresponding liquidity pool takes the trade's other side. The pool immediately seeks to offload that risk by increasing its available Repo trade capacity. Once Repo traders fill that capacity, the pool's exposure gets neutralized. In exchange for taking this very short-term exposure, the pool earns yield.

The pool optimizes for 100% token yield, so:

• If the pool token's price increases —> the pool receives slightly fewer tokens back + a yield

• If the pool token's price decreases —> the pool receives slightly more tokens back + a yield

• If the pool token's price is flat —> the pool gets the same amount of tokens back + a yield

This short-term exposure put the liquidity pools in the position of an insurance fund for its markets.

LPs

The AMM accepts any trade that increases its expected future utility, a risk-adjusted weighted average of its assets evaluated in both underlying token and USD units, which means the system, on average, will outperform holding the underlying token on the downside while slightly underperforming holding on the upside.

In exchange for their liquidity, LPs reap the small premium the AMM charges on every trade. LPs make money because leveraged long trades tend to be priced at a very positive expected value for the AMM. In contrast, the offsetting Repo trades tend only to have slightly negative expected values for the AMM (but they substantially reduce underlying price risk). The offsetting returns of leveraged longs and Repo trades intend to make LPs delta-neutral regarding the underlying pool assets.

Who Might Be Interested in LPing on Kubo:

• Token treasuries that want to earn a yield on their tokens and accumulate more when the price goes down while facilitating leverage for their communities.

• Projects that want to give users and influencers a 100x return story even though the underlying token only has 2x return potential.

• VCs and whales who want to earn a yield on their otherwise idle token holdings.

Integrations

Liquidity pools will be released on Susa in the near future in addition to stablecoin vaults.