LP Position
Last updated
Last updated
The current status of a position: either open or closed. Open positions are active and continue to accumulate interest, even if they aren’t generating yield (i.e., if they are out of range). Closed positions have repaid the debt and returned the collateral to the user.
During position creation, users must set a price range for providing liquidity in the Uniswap V3 pool. The range is expressed as the price of Token A relative to Token B. Your position earns fees only when the current pool price is within this range.
A position is considered in range when the current pool price is within the set price boundaries. Only when the position is in range will it generate yield. Users can close and reopen positions at any time, and once the price returns within the range, yield generation resumes.
If the pool price moves outside the specified range, the position becomes out of range and stops generating yield. Borrowing interest continues to accrue during this time.
The initial amount of funds deposited into the LP Vault. This forms the base for calculating the possible leverage. Users can deposit one or both tokens required by the LP pool. In some cases, part of the collateral may remain as extra collateral if the deposited amounts don’t match the required ratios for the Uniswap V3 pool.
By borrowing with leverage, user creates debt which incurs interest. Interest rates depend on the asset’s utilization in the pool:
Low Utilization: Borrowing costs are minimal when utilization is low, keeping leverage affordable.
High Utilization: As utilization approaches its 85% cap, borrowing costs rise. In cases of over-utilization due to price fluctuations in Uniswap V3 pools, APY on debt can spike, making it expensive to maintain high leverage. This dynamic encourages borrowers to repay some debt or attracts new liquidity providers, helping to rebalance the pool.
The total amount of funds deposited into the LP pool, which includes both the user’s collateral and borrowed funds (debt).
The total value of your position, including both your initial collateral and the borrowed funds. In simple terms, it’s the sum of your LP size and any extra collateral.
Your equity represents the value of your own capital within the position. Initially, it equals the value of your collateral, but it fluctuates as token prices change. It can be calculated as:
Leverage allows you to borrow additional funds on top of your collateral, increasing your exposure in the LP pool. While leverage can boost profits, it also magnifies risks, as it increases the chance of liquidation if the position's value drops.
Example: If you use 3x leverage, you are borrowing an additional 2x on top of your deposit, so your total exposure in the pool is 3 times your initial deposit
Margin level measures how much collateral you have relative to the borrowed debt. It indicates the safety of your position: a higher margin level means your position is safer, while a lower margin level means you’re closer to liquidation.
Example: A margin level of 1.5 means that your collateral is worth 1.5 times the debt you’ve borrowed
Leverage and margin level are inversely related. As you increase leverage, your margin level decreases, meaning your position becomes riskier. Conversely, maintaining a high margin level limits how much leverage you can take but keeps your position safer from liquidation.
Example: A margin level of 1.5 corresponds to a leverage of 3x, while a margin level of 2.0 corresponds to 2x leverage
When using leverage, there is always a risk of liquidation if the pool price falls outside the set liquidation price range. This range has both lower and upper bounds and represents the price of Token A relative to Token B. If the current pool price moves outside this range, your position will be liquidated to repay the debt.
Deleveraging is an automatic process triggered when a position's margin level drops below a certain threshold, but before it reaches liquidation. In this case, a portion of the assets is withdrawn from the LP pool and used to repay part of the debt, improving the margin level and reducing the risk of liquidation. This safety mechanism helps protect the user's position by lowering leverage and maintaining the stability of the investment.
Liquidation is the forced closing of your position by the protocol. It occurs when the value of your equity is about to fall below the value of your debt. This process ensures that lenders are protected by repaying the borrowed funds. Liquidation can be triggered by anyone.
The health metric indicates the safety of a leveraged position based on its current margin level. It compares your margin level to the initial margin requirement and the liquidation margin. A health value close to 100% indicates a healthy position, while a value approaching 0% signals that the position is at risk of liquidation. If the health metric reaches 0%, the position will be liquidated.
The cost you pay to borrow funds from liquidity providers. Interest rates increase as the utilization of available liquidity increases, making borrowing more expensive
When the majority of the liquidity in lending pools is utilized, borrowing costs can increase significantly. This warning informs the user that their position may become less profitable, or even unprofitable, once borrowing costs are factored in.
