Rehypothecation of Liquidity
Last updated
Last updated
Since Limitless LPs simultaneously supply liquidity to Uniswap, the LP process in Limitless can aptly be described as 'recycling' liquidity. In doing so, LPs earn both swap fees generated in Uniswap and premiums generated in Limitless.
Therefore, LPs earn higher yields(without incurring additional IL risk) than they would in Uniswap.
Limitless withdraws liquidity from ticks outside of current price ranges. This liquidity is then lent out to traders and borrowers. The premiums(interest) paid by these participants accrue as additional yield to these out-of-range ticks.
This is illustrated in the diagram above. The LP's liquidity position is represented as the rectangular block. At a given moment, only ticks in region A might be consumed by swappers in Uniswap, while all other liquidity sits idle. In Limitless, however, region B can be withdrawn and lent out. Both regions A and B are then being utilized to generate yield.
As shown in the diagram, there can be instances where price decreases such that the current price range overlaps with the borrowed range. In such instances, the premiums quoted to the traders and borrowers will almost always be greater than the swap fees generated had the liquidity not been lent out. Therefore, there is almost no opportunity cost for lending out idle liquidity.
Although the above diagrams suggest a peer-to-peer system, The Limitless protocol, in reality, is a peer-to-pool mechanism
The infographic below illustrates how the protocol consolidates multiple LP positions into a single, unified liquidity pool, from which borrowed capital is then allocated by deducting dotted blocks from this aggregate distribution.
The peer-to-pool structure permits LPs to withdraw their position as long as there is remaining liquidity provided by other participants who have supplied to ranges overlapping with theirs.
