General Overview

Deepool manages the distribution of liquidity throughout DeFi by synchronizing the efforts of Liquidity Providers (LPs) and Liquidity Directors (LDs). LPs contribute assets through single-sided staking into the system, while LDs guide this liquidity to AMMs/exchanges by staking and casting votes with their FLT. LPs are vital to Deepool's functionality and are highly valued. The system's design, coupled with strategic deployment safeguards, aims to minimize potential impermanent loss (IL) for LPs, maintaining a secure operational state for the protocol. This is achieved through a well-structured surplus/deficit management, reserves, and FLT staked as collateral, forming what we call the mitigation waterfall. Deepool's objectives are to maintain sustainable liquidity across DeFi, enhance Protocol Controlled Assets (PCA), and shield LPs from impermanent loss.

Basic Mechanics of FlowFi Liquidity

Deployment The following illustration demonstrates the process of a Reactor deploying liquidity to an external trading venue. While the focus is primarily on automated market makers, due to their relevance in relation to IL, the same fundamental principles apply to deployments to order book exchanges.

LPs contribute one-sided liquidity to Pair Reactors (the FlowFi ETH and stablecoin pools) and individual Token Reactors (various assets).

Liquidity Directors (LDs) stake DPT to the token reactors and direct the liquidity to their preferred trading venue.

The system calculates the amount of assets to be deployed based on the quantity of the asset in the POA (and the DPT staked to the specific reactor), as detailed in the “Deployment Logic” section.

Ultimately, the system extracts the necessary quantities of both assets from the Pair Reactor and the asset side of the Token Reactor, deploying them as instructed by the LDs.

POA (System Reserve) and Operational Surplus

Operational Surplus A key source of value used to maintain or enhance the POA is the operational surplus, which arises from the change in asset ratios in AMM pools (the same mechanism that results in asset deficits). These operational surpluses, drawn upon by the system, must be considered at both the reactor and system levels, as the system aims to rebalance and optimize at each level.

System Reserve

The system reserve is the primary source of assets for compensating LDs. Following collateralization events, the system will have a surplus of both ETH/stablecoins and the initially supported assets in its POA. These will be used in internal swaps (for example, with assets from the operational surplus) in the event of a loss. Firstly, the reserve is deployed to compensate LPs, followed by using DPT staked to that reactor. As a final measure, ETH or stablecoins can be drawn from the POA if an internal swap for the asset in deficit isn't feasible. This scenario is unlikely unless there are flaws in the deployment guardrails or a price change occurs that exceeds the guardrails' mitigation capacity.

Impermanent Loss

Individual LPs often perceive impermanent loss as the difference in the total value of assets deployed after a shift in the asset ratio of the pool due to exchange rate changes (“sell the winner, buy the loser”), akin to a constant mix strategy in portfolio management. FlowFi considers impermanent loss from the perspective of a negative change in the quantity of one of the assets deployed to an AMM trading venue. In essence, FlowFi strives to ensure that LPs can withdraw the same quantity of assets they initially deposited. This methodology, combined with other system specifics, allows for asset rebalancing that should only result in a net loss at the system level under extreme market conditions.