Liquidity Vault

In our system, the Liquidity Vault is a simplified mechanism to earn a yield by underwriting the issuance of Depeg Swaps, providing liquidity in the AMM to earn trading fees as well as additional protocol fees that all flow to the Liquidity Vault.

The Vault receives deposits of Redemption Asset (eg Eth in below example) in exchange for the Liquidity Vault Token or LV - a token that represents a fraction of ownership in the Liquidity Vault. The vault then takes a portion of the Redemption Asset to mint Cover Token + Depeg Swap. The remaining Redemption Asset + Cover Token is used to provide liquidity to an Automated Market Maker (AMM). The vault receives back Liquidity Provider (LP) positions. The Depeg Swaps minted is gradually sold to through the flash swaps router filling a portion of Depeg Swap buying pressure, instead of those Depeg Swaps being bought directly in the AMM. The below graphic shows the Vault Deposit flow for an Eth-stETH pair, where Eth is the Redemption Asset and stETH as the Pegged Asset.

Liquidity Vault Funds at expiry

At expiry, the following operations will occur in the Liquidity Vault:

1. The AMM LP is redeemed to receive Cover Token + Redemption Asset

2. Any excess Depeg Swap in the Liquidity Vault is paired with Cover Token to mint Redemption Asset

3. The excess Cover Token is used to claim Redemption Asset + Pegged Asset as described above

4. End state: Only Redemption Asset + redeemed Pegged Asset remains

Initiating a new expiry

At the end state, the Redemption Asset will be used to initiate a new expiry, including splitting it into Cover Token +Depeg Swap and initiating a new AMM. Liquidity Vault tokenholders continue to accrue value and do not have to take any action.

Withdrawal Mechanism

Below # refers to the total supply of this token, for example #LV means total supply of Liquidity Vault Token.

Liquidity Vault tokenholders can withdraw prior to expiry, the following logic is applied to calculate how many RA they receive per LV:

1. AMM LP Liquidation

$$\frac{\#LP}{\#LV}$$

• Where #LP refers to number of LP tokens held by the Liquidity Vault. LP Liquidation provides Cover Token + Redemption Asset.

2. Depeg Swap Pairing with Cover Token

$$\frac{\#DS \ in \ LV}{\#LV}$$

• This amount of Depeg Swap is paired with Cover Token to mint Redemption Asset.

3. Excess Cover Token from the AMM LP liquidation is sold into the AMM to receive Redemption Asset.

4. The fraction of Redemption Asset attributed to the Liquidity Vault tokenholder is added to total amount of Redemption Asset to be withdrawn, calculated as follows:

$$\frac{\#RA \ in \ LV}{\#LV}$$

5. The amount of Redemption Asset attributed per Liquidity Vault token from steps 1-4 can be claimed by the Liquidity Vault tokenholder in exchange for burning their Liquidity Vault token

Note: All Liquidity Vault token counts are for the supply of Liquidity Vault token prior to the withdrawal/burn.