Liquidity Pools

Liquidity Pools are single-asset pools that offer yield in that asset (single-sided staking).

When a new leveraged long trade is opened, the corresponding liquidity pool initially takes the other side of the trade. The pool then immediately seeks to offload that risk by increasing its available Repo trade capacity. Once Repo traders fill that capacity, the pool's exposure is neutralized. In exchange for taking this very short-term exposure, the pool earns yield.

The pool optimizes for 100% token yield, so:

• If the pool token's price increases —> the pool receives slightly fewer tokens back + a yield

• If the pool token's price decreases —> the pool receives slightly more tokens back + a yield

• If the pool token's price is flat —> the pool receives the same amount of tokens back + a yield

This short-term exposure put the liquidity pools in the position of an insurance funds for its markets.

LPs

The AMM accepts any trade that increases its expected future utility—utility is a risk-adjusted weighted average of its assets evaluated in both underlying token and USD units. This means the system, on average, will outperform HODLing the underlying token on the downside, while slightly underperforming HODLing on the upside.

In exchange for their liquidity, LPs reap the small premium the AMM charges on every trade. LPs make money because leveraged long trades will tend to be priced at a very positive expected value to the AMM, while the offsetting Repo trades will tend to be only slightly negative expected value to the AMM (but they substantially reduce underlying price risk). The offsetting returns of leveraged longs and Repo trades are intended to make LPs delta-neutral in terms of the underlying pool assets.

Who Might Be Interested in LPing on Longship:

• Token treasuries that want to earn yield on their tokens, accumulating more when price goes down while facilitating leverage for their communities

• Projects that want to give users and influencers a 100x return story even though the underlying token only has 2x return potential

• VCs and whales who want to earn yield on their otherwise idle token holdings