> For the complete documentation index, see [llms.txt](https://sushi-labs.gitbook.io/kubo-documentation/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://sushi-labs.gitbook.io/kubo-documentation/how-kubo-works/liquidity-pools.md). # Liquidity Pools When a new leveraged long trade opens, the corresponding liquidity pool takes the 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. This means the system will, on average, 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. --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter, and the optional `goal` query parameter: ``` GET https://sushi-labs.gitbook.io/kubo-documentation/how-kubo-works/liquidity-pools.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.