All you need to know about USDC vaults and the BLP token

Minting/Redeeming the BLP Token

Anyone can mint BLP tokens by adding USDC to the vault. The price for minting and redeeming tokens is calculated based on: (the total worth of assets in the pool, including profits and losses of all previous trades) / (BLP supply). You can see the exchange rate on the earn page

https://app.buffer.finance/ARBITRUM/earn

Once minted, the BLP token is automatically staked, and you will start earning trading fees and esBFR rewards.

Upon minting, BLP is staked by default, and the user earns:

  • USDC: 70% of the trading (platform) fee
  • esBFR tokens: At a pre-determined emission rate

How does the USDC vault generate yield?

The USDC vault act as a counterparty to all the trades placed on the options trading platform. In return, 70% of the trading fee (In USDC) generated is distributed to BLP holders. Other than the trading fee, BLP holders can also earn from the PnL of the pool, whenever a trader makes a positive PnL, the pool loses, and whenever a trader makes a negative PnL, the pool makes a profit. The pool has a probabilistic edge that can generate a positive yield consistently over the long term. Additionally, esBFR rewards are also emitted to the liquidity providers That can be either claimed for vesting or compounded to earn additional USDC yield.

What risks are associated with being a liqudity provider in the USDC vault?

Whenever a trader places an order on the platform the vault takes a counterposition to that trade. If the trader makes the right prediction the vault pays the trader a pre-defined payout and if the trader makes a wrong prediction they lose 100% of the bet amount to the vault.

As you can guess there can be scenarios where a well-informed trader can make a series of right predictions and win USDC from the vault and this might cause a drawdown or you can say the exchange rate of BLP token might go down.

To compensate for taking this risk, liqudity providers are paid up to 70% of the settlement fee earned, and also other risk-management measures are employed at the protocol level.

How does the vault maintain a probabilistic edge?

The probability of the price of an asset going up or down from the current price within a short period of time is typically 50% but the payout offered to the trader is not 1:1 to the pay-in amount.

Here’s an example — Let’s suppose the payout ratio offered by the vault is 1:0.8 (80%), and there are 100 traders. 50 of them bet 100 USDC each that the BTC/USDC would go up in an hour. And the other 50 bets, 100 USDC each, that BTC/USDC will go down within the same time. If BTC/USD ends up after the hour, that means those who bet that BTC/USD will rise will receive 180 USDC each, while those who bet otherwise ended up with zero returns. Thus, the total payout is 9,000 USDC, and the vaults generate 1000 USDC as yield.

What Risk management measures are taken at the protocol level to prevent long-tail event risk?

Over and above having a probabilistic edge, there are also some other features to manage risk associated with any long-tail event for the liquidity providers.

  1. Trade size limit — Max trade size can be 2% of the available liquidity. For example, if the liquidity pool has 100,000 USDC of available liquidity, the max trade size can be 2000 USDC.
  2. Max utilization of vault — Max vault utilization at a time is capped at 64% of the total available liqudity
  3. Max cap — Max liquidity that can be deposited in the pool is $1M (Will be increased gradually)
  4. Pause trading — In the case of highly volatile scenarios trading for a given pair/asset can be paused.

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Buffer Finance

Buffer Finance

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Short-term and fast-paced gamified options trading platform.