Standard Liquidity Providers
Insuring the insurance (Hedging Agents)
- Standard Liquidity Providers (SLPs) deposit collateral in Angle Core module against sanTokens, yield-bearing tokens that automatically accrue interest and fees.
- Angle Core Module is a marketplace between people who want volatility and people who want stability, SLPs serve as the buffer between these two kinds of people when they are not perfectly balanced.
- SLPs get transaction fees from users minting and burning as well as yield from reserves being lent. The Core module can guarantee them higher yield than what they would get on other lending platforms.
- They may face a small slippage when they exit if the Core module is not enough collateralized.
Standard Liquidity Providers are the buffer for the moments when hedging agents do not fully cover the collateral that was brought by users.
They entrust Angle Core module with their liquidity and like liquidity providers in other protocols (Compound, Uniswap, Aave), they automatically accrue interest on the assets they brought. The risk for them is to incur a slippage when the Core module is not enough collateralized and they want to cash out.
There are different incentives for SLPs to come to Angle Core module:
- A fraction of the transaction fees induced by users minting and burning stable assets are redistributed to SLPs in proportion to how they contribute to the Core module.
- At each point in time, the Core module owns reserves which are only useful when redeemed by a user, a SLP or an HA. Part of the reserves is automatically transferred to strategies (like Yearn strategies) responsible for getting yield on it by, for instance, lending to protocols like Compound or Aave. SLPs gets a fraction of the interest made by these strategies.
Note that SLPs are also able to stake their positions (in the form of sanTokens) to receive ANGLE rewards.
The fraction of transaction fees and interest going to SLPs correspond to two different parameters controlled by governance. The interest for SLPs is computed after taking into account the share going to veANGLE holders. The value of these parameters can be seen in Angle Analytics. Note that they can be specific for each collateral.
In general, the less SLPs there are, the more a single SLP, for a similar amount invested, receives transaction fees, interest, and ANGLE rewards. This mechanism thus incentivizes SLPs to re-collateralize the Core module when it is not collateralized enough.
For the interest on lending, there is an even more interesting multiplier effect for SLPs.
Multiplier Effect for SLPs
Let's assume that 80% of the Core module's reserves are lent to Compound with a 10% APY and that 50% of the interest are given to SLPs. By directly lending their 500,000 USDC to this strategy, SLPs would earn 500K * 10% = 50K USDC per year.
With Angle Core module, they get a multiplier effect on their collateral coming from the collateral of users and HAs on which they also receive interest.
In that case, they would effectively get 2.5M * 80% * 10% * 50% = 100,000 USDC / year, or double what they would earn by lending directly to Compound.
This multiplier effect becomes less interesting the more SLPs bring collateral to the Core module compared to users and HAs.
When the collateral ratio is too small, in order to guarantee that any stablecoin owner is able to redeem collateral with its stablecoin, SLPs can face a slippage when they exit.
For instance if the slippage is 10%, then a SLP willing to get 100 of collateral back will only get back 90, and the 10 of collateral difference will never be recovered.
The slippage factor depends on the collateral ratio: the smaller the collateral ratio, the bigger the slippage for SLPs exiting. Above a certain collateral ratio (120%), SLPs face no slippage.
The structure of the slippage function is updatable by the governance or the guardian.
While the collateral ratio is a quantity that relates to a stablecoin, the slippage functions faced by SLPs is specific to each collateral. For instance for a collateral ratio of 100%, the slippage may be 0.3% for SLPs that brought DAI and of 0% for SLPs that brought USDC.
One rule that can be set to incentivize SLPs to re-capitalize a pool when the overall collateral ratio of the Core module is too low is putting aside progressively part of the transaction fees that should arrive to SLPs of this pool.
These fees would only be recovered by SLPs once the pool becomes collateralized again, and they would be distributed in a proportion that depends on the composition of the pool at the time of re-collateralization. This means that a new SLP giving money to re-collateralize a pool may receive transaction fees for transactions that occurred before her arrival in the pool.