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0044-LIME-lp_mechanics.md

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Liquidity provision mechanics

The point of liquidity provision on Vega is to incentivise people to place orders on the market that maintain liquidity on the book. This is done via a financial commitment and reward + penalty mechanics, and through the LP commitment transaction that announces that a party is entering the liquidity provision (LP) service level agreement (SLA).

Important note on wording:

  • liquidity provision / liquidity COMMITMENTs are the amount of stake a liquidity provider places as a bond on the market to earn rewards.
  • the COMMITMENT is converted via a multiplicative network parameter market.liquidity.stakeToCcyVolume to a liquidity OBLIGATION, measured in price level x volume i.e. settlement currency of the market.

Network and market parameters

Network parameters

  • market.liquidity.bondPenaltyParameter - used to calculate the penalty to liquidity providers when they fail to support their open position through sufficient general+margin balance. Valid values: any decimal number >= 0 with a default value of 0.1.
  • market.liquidity.sla.nonPerformanceBondPenaltySlope - used to calculate how much is the LP bond slashed if they fail to reach the minimum SLA. Valid values: any decimal number >= 0 with a default value of 2.0.
  • market.liquidity.sla.nonPerformanceBondPenaltyMax - used to calculate how much is the LP bond slashed if they fail to reach the minimum SLA. Valid values: any decimal number >= 0 and <=1.0 with a default value of 0.5.
  • market.liquidity.maximumLiquidityFeeFactorLevel - used in validating fee amounts that are submitted as part of the LP commitment transaction. Note that a value of 0.05 = 5%. Valid values are: any decimal number >=0 and <=1. Default value 1.
  • market.liquidity.stakeToCcyVolume - used to translate a commitment to an obligation. Any decimal number >0 with default value 1.0.
  • validators.epoch.length - LP rewards from liquidity fees are paid out once per epoch according to whether they met the "SLA" (implied by market.liquidity.commitmentMinTimeFraction) and their previous performance (for the last n epochs defined by market.liquidity.performanceHysteresisEpochs), see epoch spec.
  • market.liquidity.earlyExitPenalty (decimal ≥0), sets how much LP forfeits of their bond in case the market is below target stake and they wish to reduce their commitment. If set to 0 there is no penalty for early exit, if set to 1 their entire bond is forfeited if they exit their entire commitment, if set >1, their entire bond will be forfeited for exiting 1/earlyExitPenalty of their commitment amount.
  • market.liquidity.probabilityOfTrading.tau.scaling sets how the probability of trading is calculated from the risk model; this is used to measure the relative competitiveness of LPs supplied volume.
  • market.liquidity.minimum.probabilityOfTrading.lpOrders sets a lower bound on the result of the probability of trading calculation.
  • market.liquidity.feeCalculationTimeStep (time period e.g. 1m) controls how often the quality of liquidity supplied by the LPs is evaluated and fees arising from that period are earmarked for specific parties. Minimum valid value is anything more than or equal 1s. Maximum valid value validators.epoch.length.

Market parameters

All following market parameters can be set / modified as part of market proposal / market change proposal and the new value take effect at the first new epoch after enactment.

  • market.liquidity.priceRange (decimal) - this is a percentage price move (e.g. 0.05 = 5%) from mid_price during continuous trading or indicative uncrossing price during auctions.

  • market.liquidity.commitmentMinTimeFraction (decimal) — minimum fraction of time LPs must spend "on the book" providing their committed liquidity. This is a decimal number in the interval $[0,1]$ i.e. both limits included. When set to $0$ the SLA mechanics are switched off for the market entirely.

  • market.liquidity.performanceHysteresisEpochs (uint) - number of liquidity epochs over which past performance will continue to affect rewards.

  • market.liquidity.slaCompetitionFactor - the maximum fraction of their accrued fees an LP that meets the SLA implied by market.liquidity.commitmentMinTimeFraction will lose to LPs that achieved a higher SLA performance than them.

For LP reward calculations based on the SLA see the 0042-LIQF spec.

Mechanism overview

At a high level, the liquidity mechanism in Vega allows Liquidity Providers (LPs) to commit liquidity to a market and "bid" to set the liquidity fee on the market. LPs that meet this commitment are rewarded from the fee revenue. This is done by:

  • Requiring LPs to meet an SLA (i.e. % of time spent providing liquidity within the defined range) in order to be rewarded.

  • Rewarding LPs more for better performance against the SLA vs other LPs, ensuring there is an incentive to do more than the bare minimum and more than other LPs, if market conditions allow.

  • Penalising LPs that commit and do not meet the SLA, to reduce the attractiveness of opportunistically going after rewards with no intention to meet the SLA in more challenging conditions, and of leeching style attacks on the rewards.

Once committed LPs attempt to meet their commitment by placing and maintaining normal orders on the market. They may use pegged or priced limit orders, along with features like post only and iceberg (or more accurately, transparent iceberg) to control their risk. Non-persistent orders, parked pegged orders, and stop-loss orders do not count towards an LP's supplied liquidity and therefore cannot be used to meet the SLA.

Commit liquidity network transaction

Any Vega participant can apply to become a liquidity provider (LP) on a market by submitting a transaction to the network which includes the following

  1. Market ID
  2. COMMITMENT AMOUNT: liquidity commitment amount (specified as a unitless number that represents the amount of settlement asset of the market)
  3. FEES: nominated liquidity fee factor, which is an input to the calculation of taker fees on the market, as per setting fees and rewarding lps

Accepted if all of the following are true:

  • The transaction is valid: the submitting party has sufficient collateral in their general account to meet the size of their nominated commitment amount.
  • The market is in a state that accepts new liquidity provision market lifecycle spec.

Commitment amount

Processing the commitment

When a commitment is made the liquidity commitment amount is assumed to be specified in terms of the settlement currency of the market. There is an minimum LP stake which is market.liquidityProvision.minLpStakeQuantumMultiple x quantum where quantum is specified per asset, see asset framework spec.

If the participant has sufficient collateral to cover their commitment, the commitment amount (stake) is transferred from the participant's general account to their (maybe newly created) liquidity provision bond account (new account type, 1 per liquidity provider per market and asset where they are committing liquidity, created as needed). For clarity, liquidity providers will have a separate margin account and bond account.

A new or increased commitment will get activated in two stages.(*) First the commitment amount (increase) will get transferred from general to bond account. Their obligation for providing liquidity under SLA is determined by their commitment from the beginning of the current epoch (so, in particular, for a new LP, it's 0). Second, at the beginning of the next epoch (after the rewards/penalties for present LPs have been evaluated), the commitment amount is noted, and the LP is expected to provide sufficient liquidity for the epoch.

(*) The exception is the end of the opening auction of the market. The LPs that submit a commitment during the opening auction become the market LPs as soon as the opening auction ends.

The fee for the market is only updated at the epoch boundary using the "auction" mechanism set here.

Liquidity provider bond account:

  • Each active market has one bond account per liquidity provider, per settlement asset for that market.
  • When a liquidity provider transaction is approved, the size of their staked bond is immediately transferred from their general account to this bond account.
  • A liquidity provider can only prompt a transfer of funds to or from this account by (re)submitting the LP commitment transaction: a valid transaction to create, increase, or decrease their commitment to the market.
    • Transfers to/from this account also occur when it is used for settlement or margin shortfall, when penalties are applied, and if the account is under-collateralised because of these uses and is subsequently topped up to the commitment amount during collateral search (see below)
  • Collateral withdrawn from this account may only be transferred to either:
    • The insurance pool of the market for markets trading on margin or the network treasury for the asset (for spot markets) (in event of penalties/slashing)
    • The liquidity provider's margin account or the network's settlement account/other participant's margin accounts (during a margin search and mark to market settlement) in the event that they have zero balance in their general account.
    • The liquidity provider's general account (in event of liquidity provider reducing their commitment)

Liquidity provider proposes to amend commitment amount

The commitment transaction is also used to amend any aspect of their liquidity provision obligations. A participant may apply to amend their commitment amount by submitting a transaction for the market with a revised commitment amount.

proposed-commitment-variation = new-proposed-commitment-amount - old-commitment-amount

An increase in amendment is actioned immediately but only has implications for rewards / penalties at start of the next epoch.

  1. the amount is immediately transferred from the party's general account to their bond account. However we keep track of commitment at start of epoch and this is used for penalties / rewards.
  2. at the beginning of the next epoch, the rewards / penalties for present LPs - including the party that's amending - are evaluated based on balance of bond account at start of epoch.

A decrease in commitment is noted but the transfer out of the bond account is only actioned at the end of the current epoch.

For each party only the most recent amendment should be considered. All the amendments get processed simultaneously, hence the relative arrival of amendments made by different LPs within the previous epoch is irrelevant (as far as commitment reduction is concerned, it still has implications for other aspects of the mechanism).

Increasing commitment

Case: proposed-commitment-variation >= 0

A liquidity provider can always increase their commitment amount as long as they have sufficient collateral in the settlement asset of the market to meet the new commitment amount.

If they do not have sufficient collateral the transaction is rejected in entirety. This means that any change in fee bid is not applied and that the old-commitment-amount is retained.

Decreasing commitment

Case: proposed-commitment-variation < 0

At the beginning of each epoch, calculate actual commitment variation for each LP wishing to reduce their commitment as:

$$ \text{commitment-variation}_i=\min(-\text{proposed-commitment-variation}_i, \text{bond account balance}_i). $$

Next, calculate how much the overall commitment within the market can be decreased by without incurring a penalty. To do this we first evaluate the maximum amount that the total_stake can reduce by without penalty given the current liquidity demand in the market.

maximum-penalty-free-reduction-amount = max(0,total_stake - target_stake)

where:

  • total_stake is the sum of all stake of all liquidity providers bonded to this market including the amendments with positive commitment variation submitted in the previous epoch.
  • target_stake is a measure of the market's current stake requirements, as per the calculation in the target stake.

Then, for each $LP_i$ we calculate the pro rata penalty-free reduction amount:

$$\text{maximum-penalty-free-reduction-amount}_i=\frac{\text{commitment-variation}_i}{\sum_{j}\text{commitment-variation}_j} \cdot \text{maximum-penalty-free-reduction-amount}.$$

If $\text{commitment-variation}_i &lt;= \text{maximum-penalty-free-reduction-amount}_i$ then we're done, the LP reduced commitment, the entire amount by which they decreased their commitment is transferred to their general account, their ELS got updated as per the ELS calculation.

If $\text{commitment-variation}_i &gt; \text{maximum-penalty-free-reduction-amount}_i$ then first establish

$$ \text{penalty-incurring-reduction-amount}_i = \text{commitment-variation}_i - \text{maximum-penalty-free-reduction-amount}_i $$

Transfer $\text{maximum-penalty-free-reduction-amount}_i$ to their general account.

Now transfer $(1-\text{market.liquidity.earlyExitPenalty}) \cdot \text{penalty-incurring-reduction-amount}_i$ to their general account and transfer $\text{market.liquidity.earlyExitPenalty} \cdot \text{penalty-incurring-reduction-amount}_i$ to the market insurance pool. Note that in the case of spot market or any market that isn't running an insurance pool the transfer should go into the network treasury for the asset.

Finally update the ELS as per the ELS calculation using the entire $\text{commitment-variation}_i$ as the delta.

Fees

Nominating and amending fee amounts

The network transaction is used by liquidity providers to nominate a fee amount which is used by the network to calculate the liquidity_fee of the market. Liquidity providers may amend their nominated fee amount by submitting a liquidity provider transaction to the network with a new fee amount. If the fee amount is valid, this new amount is used. Otherwise, the entire transaction is considered invalid.

How fee amounts are used

The liquidity_fee of a market on Vega takes as an input, a fee factor[liquidity] which is calculated by the network, taking as an input the data submitted by the liquidity providers in their liquidity provision network transactions (see this spec for more information on the specific calculation).

Distributing fees between liquidity providers

When calculating fees for a trade, the size of a liquidity provider’s commitment at the start of the epoch along with when they committed and the market size are inputs that will be used to calculate how the liquidity fee is distributed between liquidity providers. See setting fees and rewarding lps for the calculation of the split.

Liquidity provision and penalties

Calculating liquidity from commitment

Committed Liquidity Providers are required to provide a multiple of their stake, at the start of the epoch, (supplied in the settlement currency of the market) in notional volume of orders within the range defined below on both sides of the order book.

The multiple is controlled by a network parameter market.liquidity.stakeToCcyVolume:

liquidity_required = stake_amount ✖️ market.liquidity.stakeToCcyVolume

Meeting the committed volume of notional

During continuous trading

If there is no mid price then no LP is meeting their committed volume of notional. If there is mid price then we calculate the volume of notional that is in the range

(1.0-market.liquidity.priceRange) x mid <= price levels <= (1+market.liquidity.priceRange)x mid.

If this is greater than or equal to liquidity_required then the LP is meeting the committed volume of notional.

During auctions

We calculate the volume of notional that is in the range

(1.0-market.liquidity.priceRange) x min(last trade price, indicative uncrossing price) <=  price levels <= (1.0+market.liquidity.priceRange) x max(last trade price, indicative uncrossing price).

If there is no 'indicative uncrossing price' then volume placed at any price should count towards the LP's commitment i.e the price range is interpreted as

-infinity <=  price levels <= infinity

If this is greater than or equal to liquidity_required then the LP is meeting the committed volume of notional.

Note: we don't evaluate whether LPs meet the SLA during opening auctions so there will always be a mark price.

Penalty for not meeting the SLA

See the Calculating the SLA performance penalty for a single epoch section in 0042-LIQF for how fraction_of_time_on_book is calculated. This is available at the end of each epoch. If, at the end of the epoch, fraction_of_time_on_book >= market.liquidity.commitmentMinTimeFraction then let $f=0$. Otherwise we calculate a penalty to be applied to the bond as follows.

Let $t$ be fraction_of_time_on_book

Let $s$ be market.liquidity.commitmentMinTimeFraction.

Let $p$ be market.liquidity.sla.nonPerformanceBondPenaltySlope.

Let $m$ be market.liquidity.sla.nonPerformanceBondPenaltyMax.

Let

$$ f = \max\left[0,\min\left(m, p \cdot (1 - \frac{t}{s})\right)\right],. $$

Once you have $f$ transfer $f \times B$ into the insurance pool of the market, where $B$ is the LP bond account balance. For spot markets, the transfer is to go into the network treasury account for the asset. Moreover, as this reduced the LP stake, update the ELS as per Calculating liquidity provider equity-like share section in 0042-LIQF.

In the case of if a liquidity provider has fraction_of_time_on_book = 0, and market.liquidity.commitmentMinTimeFraction = 0, then f = max[0,min(m,p)]

In the case of spot markets the transfer goes into the network treasury account for the asset.

Penalty for not supporting open positions

If at any point in time, a liquidity provider has insufficient capital to make the transfers for their mark to market or other settlement movements, and/or margin requirements arising from their orders and open positions, the network will utilise their liquidity provision commitment, held in the liquidity provider bond account to cover the shortfall. The protocol will also apply a penalty proportional to the size of the shortfall, which will be transferred to the market's insurance pool.

Calculating the penalty:

bondPenalty = market.liquidity.bondPenaltyParameter ⨉ shortfall

The above simple formula defines the amount by which the bond account will be 'slashed', where:

  • market.liquidity.bondPenaltyParameter is a network parameter
  • shortfall refers to the absolute value of the funds that the liquidity provider was unable to cover through their margin and general accounts, that are needed for settlement (mark to market or product driven) or to meet their margin requirements.

Auctions: if this occurs at the transition from auction mode to continuous trading, the market.liquidity.bondPenaltyParameter will not be applied / will always be set to zero.

The network will:

  1. As part of the normal collateral "search" process: Access first the liquidity provider's bond account to make up the shortfall. If there is insufficient funds to cover this amount, the full balance of both bond accounts will be used. Note that this means that the transfer request should include the liquidity provider's bond account in the list of accounts to search, and that these accounts would always be emptied before any market insurance pool funds are used or loss socialisation occurs.

  2. If there was a shortfall and the bond account was accessed: Transfer an amount equal to the market.liquidity.bondPenaltyParameter calculated above from the liquidity provider's bond account to the market's insurance pool. If there are insufficient funds in the bond account and the bond account, the full amount will be used and the remainder of the penalty (or as much as possible) should be transferred from the liquidity provider's margin account.

  3. Initiate closeout of the LPs order and/or positions as normal if their margin does not meet the minimum maintenance margin level required. (NB: this should involve no change)

  4. The liquidity provider's bond account balance is always their current commitment level: This is strictly their "true" bond account.

Note:

  • As mentioned above, closeout should happen as per regular trader account (with the addition of cancelling the liquidity provision and the associated LP rewards & fees consequences). So, if after cancelling all open orders the party can afford to keep the open positions sufficiently collateralised they should be left open, otherwise the positions should get liquidated.

What data do we keep relating to liquidity provision?

  1. List of all liquidity providers and their commitment sizes (bond account balance), the commitment at the start of epoch, their “equity-like share” and "liquidity score" for each market see 0042-setting-fees-and-rewarding-lps
  2. New bond account per LP per market
  3. Actual amount of liquidity supplied (can be calculated from order book, see 0034-prob-weighted-liquidity-measure)

APIs

  • Transfers to and from the bond account, new or changed commitments, and any penalties applied should all be published on the event stream
  • It should be possible to query all details of liquidity providers via an API

Acceptance Criteria

  • Through the LiquidityProvisions API, I can list all active liquidity providers for a market (0044-LIME-001)

  • Through the LiquidityProviders API, I can list all active liquidity providers fee share information

  • When a LP commits liquidity on market 1, on market 2 this LP has no liquidity commitment when I request for all LP provisions through ListLiquidityProvisions api for this party, then only LP provisions for market 1 is returned. (0044-LIME-087)

  • The bond slashing works as the feature test claims. (0044-LIME-002).

  • Change of network parameter market.liquidity.bondPenaltyParameter will, as soon as the current epoch ends, change the amount by which the bond account will be 'slashed' when a liquidity provider has insufficient capital for Vega to make the transfers for their mark to market or other settlement movements, and/or margin requirements arising from their orders and open positions. (0044-LIME-003)

  • Change of market.liquidity.maximumLiquidityFeeFactorLevel will change the maximum liquidity fee factor. Any new submission or amendments must respect the new maximum (those that don't get rejected). (0044-LIME-006)

  • Check that bond slashing works with non-default asset decimals, market decimals, position decimals. This can be done by following a similar story to bond slashing feature test. Should test at least three different combinations, each decimal settings different to each other. (0044-LIME-009)

  • If market.liquidity.stakeToCcyVolume is set to 0.0, there is target stake of 1000 and there are 3 LPs on the market with stake / fee bid submissions of 100, 0.01, 1000, 0.02 and 200, 0.03 then the liquidity fee is 0.02. (0044-LIME-012)

  • If a liquidity provider has fraction_of_time_on_book >= market.liquidity.commitmentMinTimeFraction, no penalty will be taken from their bond account (0044-LIME-013). For product spot (0044-LIME-102)

  • If a liquidity provider has fraction_of_time_on_book = 0.3, market.liquidity.commitmentMinTimeFraction = 0.6, market.liquidity.sla.nonPerformanceBondPenaltySlope = 0.7, market.liquidity.sla.nonPerformanceBondPenaltyMax = 0.6 at the end of an epoch then they will forfeit 35% of their bond stake, which will be transferred into the market's insurance pool (0044-LIME-014) and in the case of spot markets into the network treasury for the asset (0044-LIME-048)

  • If a liquidity provider has fraction_of_time_on_book = 0.3, market.liquidity.commitmentMinTimeFraction = 0.6, market.liquidity.sla.nonPerformanceBondPenaltySlope = 0.7, market.liquidity.sla.nonPerformanceBondPenaltyMax = 0.6and the market parameter change market.liquidity.commitmentMinTimeFraction = 0.3 is enacted during the epoch then at the end of the current epoch LP will have their bond slashed. If the LP has fraction_of_time_on_book = 0.3 at the end of the next epoch, they are meeting their commitment and will not forfeit any of their bond stake. (0044-LIME-088). For product spot (0044-LIME-103)

  • If a liquidity provider has fraction_of_time_on_book = 0.3, market.liquidity.commitmentMinTimeFraction = 0.0, market.liquidity.sla.nonPerformanceBondPenaltySlope = 0.7, market.liquidity.sla.nonPerformanceBondPenaltyMax = 0.6and the market parameter change market.liquidity.commitmentMinTimeFraction = 0.6 is enacted during the epoch then at the end of the current epoch LP will not forfeit any of their bond stake. If the LP has fraction_of_time_on_book = 0.3 at the end of the next epoch at the end of the next epoch, the LP will have their bond slashed. (0044-LIME-089). For product spot (0044-LIME-104)

  • If a liquidity provider has fraction_of_time_on_book = 0, market.liquidity.commitmentMinTimeFraction = 0.6, market.liquidity.sla.nonPerformanceBondPenaltySlope = 0.7, market.liquidity.sla.nonPerformanceBondPenaltyMax = 0.6 at the end of an epoch then they will forfeit 60% of their bond stake, which will be transferred into the market's insurance pool (0044-LIME-015) and in the case of spot markets into the network treasury for the asset (0044-LIME-046)

  • If a liquidity provider has fraction_of_time_on_book = 0, market.liquidity.commitmentMinTimeFraction = 0.6, market.liquidity.sla.nonPerformanceBondPenaltySlope = 0.2, market.liquidity.sla.nonPerformanceBondPenaltyMax = 0.6 at the end of an epoch then they will forfeit 20% of their bond stake, which will be transferred into the market's insurance pool (0044-LIME-016) and in the case of spot markets into the network treasury for the asset (0044-LIME-047)

  • If a liquidity provider with an active liquidity provision at the start of an epoch reduces their liquidity provision staked commitment during the epoch the initial committed level at the start of the epoch will remain in effect until the end of the epoch, at which point the protocol will attempt to reduce the bond to the new level. (0044-LIME-018). For product spot (0044-LIME-105)

  • If a liquidity provider with an active liquidity provision at the start of an epoch reduces their liquidity provision staked commitment during the epoch the initial committed level at the start of the epoch will remain in effect until the end of the epoch, at which point the protocol will attempt to reduce the bond to the new level. If the reduced level has been changed several times during an epoch, only the latest value will take effect (0044-LIME-019). For product spot (0044-LIME-106)

  • If a liquidity provider with an active liquidity provision at the start of an epoch reduces their liquidity provision staked commitment during the epoch the initial committed level at the start of the epoch will remain in effect until the end of the epoch, at which point the protocol will attempt to reduce the bond to the new level. If the bond stake has been slashed to a level lower than the amendment, this slashed level will be retained (i.e. the protocol will not attempt to now increase the commitment) (0044-LIME-020). For product spot (0044-LIME-107)

  • If a liquidity provider with an active liquidity provision at the start of an epoch amends the fee level associated to this commitment during the epoch, this change will only take effect at the end of the epoch. (0044-LIME-021). For product spot (0044-LIME-108)

  • If a liquidity provider with an active liquidity provision at the start of an epoch increases their liquidity provision staked commitment during the epoch, the amended committed level will take affect immediately and the protocol will attempt to increase the bond to the new level, if they do not have sufficient collateral in the settlement asset of the market to meet new commitment amount then the amendment will be rejected and old commitment amount is retained (0044-LIME-030). For product spot (0044-LIME-109)

  • If a liquidity provider with an active liquidity provision at the start of an epoch increases their liquidity provision staked commitment during the epoch, the amended committed level will take affect immediately and

    • the protocol will increase the bond to the new level if they have sufficient collateral in the settlement asset of the market to meet new commitment amount (0044-LIME-031). For product spot (0044-LIME-110)
    • at the end of the current epoch rewards / penalties are evaluated based on the balance of the bond account at start of epoch (0044-LIME-049). For product spot (0044-LIME-111)

  • A liquidity provider who reduces their liquidity provision such that the total stake on the market is still above the target stake after reduction will have no penalty applied and will receive their full reduction in stake back at the end of the epoch. (0044-LIME-022). For product spot (0044-LIME-112)

  • For a market with market.liquidity.earlyExitPenalty = 0.25 and target stake > total stake already, a liquidity provider who reduces their commitment by 100 will only receive 75 back into their general account with 25 transferred into the market's insurance account. (0044-LIME-023) In the case of spot markets it will be transferred into the network treasury for the asset (0044-LIME-045)

  • For a market with market.liquidity.earlyExitPenalty = 0.25 and total stake = target stake + 40 already, a liquidity provider who reduces their commitment by 100 will receive a total of 85 back into their general account with 15 transferred into the market's insurance account (40 received without penalty, then the remaining 60 receiving a 25% penalty). (0044-LIME-024). In the case of spot markets it will be transferred into the network treasury for the asset (0044-LIME-044)

  • For a market with market.liquidity.earlyExitPenalty = 0.25 and total stake = target stake + 140 already, if one liquidity provider places a transaction to reduce their stake by 100 followed by a second liquidity provider who reduces their commitment by 100, the first liquidity provider will receive a full 100 stake back whilst the second will receive a total of 85 back into their general account with 15 transferred into the market's insurance account (40 received without penalty, then the remaining 60 receiving a 25% penalty). (0044-LIME-025)

In the case of spot markets it will be transferred into the network treasury for the asset (0044-LIME-043)

  • For a futures market with market.liquidity.earlyExitPenalty = 0.25 and total stake = target stake + 140 already, if the following transactions occur:

    • LP1 places a transaction to reduce their stake by 30
    • LP2 places a transaction to reduce their stake by 100, and then wait until end of the epoch,
    • LP1 places a transaction to update their reduction to 100 LP2 will receive a full 100 stake back whilst LP1 will receive a total of 85 back into their general account with 15 transferred into the market's insurance account (0044-LIME-026)

  • When LP is committed they are obliged to provide liquidity equal to their commitment size on both sides of the order book (0044-LIME-027)

  • For a market that is in opening auction and LP has committed liquidity:

    • When a LP increases their commitment then:
      • It takes effect immediately for the purposes of LP stake supplied to the market
      • In terms of the liquidity they are expected to supply: this only takes effect from the start of the next epoch (0044-LIME-050). For spot (0044-LIME-054)
    • LP can decrease or cancel their commitment and it will take effect immediately without incurring penalties (0044-LIME-051). For spot (0044-LIME-055)
    • If target stake is 0 then any LP can cancel their commitment without incurring penalties (0044-LIME-053)

  • For a market that is in continuous trading and a single LP has committed liquidity:

    • The LP can cancel their commitment at any time (though this may involve incurring a penalty) (0044-LIME-060). For spot (0044-LIME-056)

  • During continuous trading an LP can submit a transaction to decrease commitment but it will only happen at the end of current epoch. (0044-LIME-101)

  • For a market that is in continuous trading and LP has committed liquidity

    • if market.liquidity.providersFeeCalculationTimeStep is set to 10s and validators.epoch.length is set to 15s, during the first 10 seconds of the current epoch parameter change market.liquidity.providersFeeCalculationTimeStep = 3s is enacted, at the end of the epoch any funds that are in ACCOUNT_TYPE_FEES_LIQUIDITY account will be distributed to ACCOUNT_TYPE_LP_LIQUIDITY_FEES on the next block. For the next epoch the distribution will take place at 3 second intervals (0044-LIME-062)

  • For a market that is in continuous trading if a new LP has active buy and sell orders on the market then makes a liquidity commitment to that market, at the start of the next epoch the active orders will count towards the LPs liquidity commitment. (0044-LIME-090)

  • If an LP with a liquidity provision and active orders on a market cancels their liquidity provision (orders remain active), after the cancellation penalty (if it applies at end of epoch) at the end of the next epoch the LP will not accrue any rewards for trades on the market. (0044-LIME-097)

  • Consider a market where market.liquidity.priceRange = 0.05 (5%) and which is in continuous trading with a mid price of 5. There is an LP who's committed to provide liquidity. They place a buy order at a price of 4.75 and a sell order at a price of 5.25 (with sufficient volume). As the epoch progresses, if the market parameter is altered to market.liquidity.priceRange = 0.01 (1%), then upon the culmination of the current epoch, the LP will still have fulfilled their committed notional volume, rendering them exempt from a bond penalty. (0044-LIME-091)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in continuous trading with a mid price set at 5. There is an LP who's committed to provide liquidity. They place a buy order at a price of 4.74 and a sell order at a price of 5.25 (with sufficient volume). As the epoch progresses, if the market parameter is altered to market.liquidity.priceRange = 0.01 (1%), then upon the culmination of the ongoing epoch, the LP will not have met their committed notional volume, resulting in the imposition of a bond penalty. (0044-LIME-093). For product spot (0044-LIME-113)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in monitoring auction with the last trade price set at 5, the indicative uncrossing price is set at 4. There is an LP who's committed to provide liquidity. They place a buy order at a price of 3.79 (which is less than 5% of 1-0.05 x min(5, 4) = 3.80), and a sell order at a price of 5.25 (with sufficient volume). At the end of the epoch, the LP has not fulfilled their committed notional volume, resulting in the imposition of a bond penalty. (0044-LIME-094). For product spot (0044-LIME-114)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in monitoring auction with last trade price set to 5, indicative uncrossing price is set to 4. There is a LP who's committed to provide liquidity. They place a buy order at price 3.8 and a sell order at price 5.25 (with sufficient volume). At the end of the epoch, the LP is meeting their committed volume of notional rendering them exempt from a bond penalty. (0044-LIME-095). For product spot (0044-LIME-115)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in monitoring auction with last trade price set to 5, indicative uncrossing price is set to 6. There is a LP who's committed to provide liquidity. They place a buy orders at price 4.75 and sell order at price 6.31 (which is larger than 5% of 1+ 0.05 x max (5, 6) = 6.30). At the end of the epoch, the LP is not meeting their committed volume of notional, resulting in the imposition of a bond penalty. (0044-LIME-096). For product spot (0044-LIME-116)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in monitoring auction with last trade price set to 5 and we do not have indicative uncrossing price. There is a LP who's committed to provide liquidity. They place a buy orders at price 4.74 (which is less than 5% of 1-0.05 x min(5, n/a) = 4.75) and sell order at price 5.25. At the end of the epoch, the LP is not meeting their committed volume of notional, resulting in the imposition of a bond penalty. (0044-LIME-098). For product spot (0044-LIME-117)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in monitoring auction with last trade price set to 5 and we do not have indicative uncrossing price. There is a LP who's committed to provide liquidity. They place a buy orders at price 4.75 and sell order at price 5.26 (which is is more than 5% of 1+ 0.05 x max (5, n/a) = 5.25). At the end of the epoch, the LP is not meeting their committed volume of notional, resulting in the imposition of a bond penalty. (0044-LIME-099). For product spot (0044-LIME-118)

  • Consider a market, where market.liquidity.priceRange = 0.05, and which is in monitoring auction with last trade price set to 5 and we do not have indicative uncrossing price. There is a LP who's committed to provide liquidity. They place a buy orders at price 4.75 and sell order at price 5.25. At the end of the epoch, the LP is meeting their committed volume of notional rendering them exempt from a bond penalty. (0044-LIME-092). For product spot (0044-LIME-119)

  • When the LP increases its commitment and the increment is higher than its general account balance, the increments are rejected, and the old provision persists. (0044-LIME-063). For spot (0044-LIME-064)

  • When LP decreases its commitment so that $\text{commitment-variation}_i &lt;= \text{maximum-penalty-free-reduction-amount}_i$, then the entire amount by which they decreased their commitment is transferred to their general account, their ELS got updated as per the ELS calculation(0044-LIME-065). For spot (0044-LIME-066)

  • When LP decreases its commitment so that $\text{commitment-variation}_i &gt; \text{maximum-penalty-free-reduction-amount}_i$ , $(1-\text{market.liquidity.earlyExitPenalty}) \cdot \text{penalty-incurring-reduction-amount}_i$ should be transferred into its general account and $\text{market.liquidity.earlyExitPenalty} \cdot \text{penalty-incurring-reduction-amount}_i$ should be transferred into market insurance pool (0044-LIME-067). For spot $\text{market.liquidity.earlyExitPenalty} \cdot \text{penalty-incurring-reduction-amount}_i$ should be transferred into the network treasury for the asset (0044-LIME-068)

  • When an LP creates a new provision with zero commitment, it should be rejected with an error message stating that the commitment amount is zero. (0044-LIME-069). For spot (0044-LIME-070)

  • When an LP amends the Fee Factor to a value greater than market.liquidity.maximumLiquidityFeeFactorLevel, the amendments are rejected (0044-LIME-071). For spot (0044-LIME-072)

  • A distressed LP (when bond account == 0 && general account == 0 && margin account < maintenance margin) will have their orders cancelled. If the LP remains distressed, the network takes over any positions the LP may hold and zeroes them out (closes them out) (0044-LIME-073).

  • If a party submits LP provisions in multiple markets then multiple bond accounts are created and managed by Vega.(0044-LIME-075). For spot (0044-LIME-076)

Qualifying Order Types

  • Once liquidity is committed, LPs can meet their commitment by placing limit orders, pegged limit orders, and iceberg orders. For iceberg orders, all the volume (including displayed and remaining volume) counts towards the commitment. (0044-LIME-028). For spot (0044-LIME-029)
  • Parked pegged limit orders and stop-loss orders do not count towards an LPs liquidity commitment. (0044-LIME-077). For spot (0044-LIME-078)
  • GFA orders during auction from LP count towards LPs liquidity commitment (0044-LIME-079). For spot (0044-LIME-080)
  • GFA orders during continuous trading mode from LP do not count towards the LP's liquidity commitment (0044-LIME-081). For spot (0044-LIME-082)

Snapshot

  • A snapshot must include the aggregate LP fee accounts and their balances so that after a node is started using the snapshot it can retain the aggregate LP fee accounts and their balances for each market. (0044-LIME-032)

Protocol upgrade

  • After a protocol upgrade each market's aggregate LP fee accounts and their balances are retained (0044-LIME-033)

Network History - Data node restored from network history segments

  • A datanode restored from network history will contain each market's aggregate LP fee accounts which were created prior to the restore and these can be retrieved via APIs on the new datanode. (0044-LIME-036)

Network parameters validation

  • Boundary values are respected for the network parameters
    • market.liquidityV2.bondPenaltyParameter valid values: >=0, <=1000 default value of 0.1 (0044-LIME-037)
    • market.liquidityV2.earlyExitPenalty valid values: >=0, <=1000 default value of 0.1 (0044-LIME-038)
    • market.liquidityV2.maximumLiquidityFeeFactorLevel valid values: >=0, <=1 default value of 1 (0044-LIME-039)
    • market.liquidityV2.sla.nonPerformanceBondPenaltySlope valid values: >=0, <=1000 default value of 2 (0044-LIME-040)
    • market.liquidityV2.sla.nonPerformanceBondPenaltyMax valid values: >=0, <=1 default value of 0.5 (0044-LIME-041)
    • market.liquidityV2.stakeToCcyVolume valid values: >=0, <=100 default value of 1 (0044-LIME-042)
    • market.liquidity.providersFeeCalculationTimeStep valid values: >0, <= validators.epoch.length default value of 60m (0044-LIME-100)

Market parameters validation

  • Boundary values are respected for the market parameters
    • market.liquidity.commitmentMinTimeFraction valid values: >=0, <=1 (0044-LIME-083)
    • market.liquidity.priceRange valid values: >0, <=20 (0044-LIME-084)
    • market.liquidity.slaCompetitionFactor valid values: >=0, <=1 (0044-LIME-085)
    • market.liquidity.performanceHysteresisEpochs valid values: >=0, <=366 (0044-LIME-086)