Isolated Pools

Motivation

Liquidity is at the heart of the Borabora protocol's focus. To build a vibrant derivatives market, there is a need for the frequent addition of cryptocurrency assets to expand the market. This provides more choices for the participants of the protocol, thereby increasing the liquidity of the protocol.
In the case of the Aggregated Pool, all liquidity assets are stored in a single pool, and users can become liquidity providers by purchasing BFLP with the cryptocurrency assets specified by the protocol, thereby earning protocol revenue and the losses of traders' positions. However, for the long-tail asset market, this is constrained by two key factors:
  • When adding to the list of tokens supported by the liquidity pool, the corresponding risks and challenges brought by the trading assets must be considered in advance.
  • When adding to the list of tokens supported for trading assets, the difference and contradiction between the types of tokens supported by the liquidity pool and the types of tokens that traders expect to profit from must be considered in advance.
This is because long-tail assets with lower on-chain liquidity and higher volatility are particularly prone to high volatility (even price manipulation), posing risks to the entire protocol. Due to these concerns, the derivatives sector has always been conservative in listing long-tail assets, preferring instead to prioritize blue-chip assets with deep liquidity and reliable price oracles.

Structure

Isolated pools allow the Borabora protocol to have multiple derivatives markets (liquidity pools), each supporting a specific subset of assets. This enables the protocol to contain the risk within each pool and to list smaller cap tokens.
You can think of the Borabora protocol as a large complex containing different pools.
For example,
It includes the Aggregated Pool we currently have. It will also add isolated pools. Within each isolated pool, there will be a specific subset of assets.
In Isolated Pool 1, the liquidity is TokenA (a long-tail asset), so in Isolated Pool 1:
  • The liquidity pool token is TokenA, and users can deposit TokenA from their wallets into the liquidity pool, thereby becoming LPs (Liquidity Providers).
  • The protocol revenue token is TokenA, which will serve as the protocol income for LPs.
  • The trading margin is TokenA, with the profit and loss settlement currency for Traders or LPs being TokenA.
In this case, the risk value is all the available TokenA in Isolated Pool 1. For isolated pools, this risk is controlled and limited within the pool. It does not affect the entire protocol.
You can also think of isolated pools as sandbox areas for long-tail tokens.

Aggregated Pool VS Isolated pool

Aspect
Aggregated Pool
Isolated Pool
Structure
All liquidity is aggregated in a single pool, where users can deposit supported assets to earn returns.
Each isolated pool supports a specific supported asset and parameters.
Security
The Total Value Locked (TVL) of the entire liquidity pool is at risk if there are price movements in the trading assets or malicious activities.
Each isolated pool contains price or risk settings that only affect a single liquidity pool, isolating its risks.
Customizability
Lacks the broad definability of cryptocurrency types.
Each isolated pool contains different crypto assets, allowing users to invest according to their own holdings and risk preferences.
Asset Availability
Listing includes only blue-chip assets or stablecoins with broad consensus.
Can accommodate a wider range of asset types, expanding services to users.

Example Walkthrough

Anyone can create isolated pools on Borabora for the cryptocurrency assets they specify. People can create isolated pools for other users to earn protocol income and the losses from traders' liquidations. For example:
  • Someone might be interested in contract trading for the DOGE/USDT currency pair, so they create a liquidity pool with USDT on Borabora, specifying the trading asset as DOGE. In this trading market, the liquidity pool asset is USDT, the margin asset is USDT, and the trading subject is DOGE. The liquidity providers and protocol income are in USDT. Next, users holding USDT can provide liquidity in the DOGE/USDT pool, and of course, they can also provide liquidity in other pools where USDT serves as the liquidity asset, depending on their risk tolerance.
  • For DOGE again, someone might be interested in contract trading for the DOGE/DOGE currency pair, so they create a liquidity pool with DOGE on Borabora, specifying the trading asset as DOGE. In this market, the liquidity pool asset is DOGE, the margin asset is DOGE, and the trading subject is DOGE. The liquidity providers and protocol income are in DOGE. Next, users holding DOGE can provide liquidity in the DOGE/DOGE pool, and of course, they can also provide liquidity in other pools where DOGE serves as the liquidity asset, depending on their risk tolerance.

Benefits to liquidity provider

  • More Choices — Isolated pools offer users a wider range of options. This opens up opportunities for introducing more customized and themed choices to the community. Since each pool might have different parameters, users can choose which pools to invest in based on their risk preferences and asset selection.
  • Capital Efficiency — Isolated pools provide an opportunity to implement more aggressive parameters within the pool, such as adjusting the trigger for collecting funding fees to 0%, to enhance capital efficiency.
  • Security — Isolated pools provide an additional layer of security for users. The risk value is entirely confined to the respective pool, thereby protecting the assets in other pools. However, it's important to note that being an LP always carries a certain level of risk. Specifically:
    1)Opening positions is prohibited when the open trade volume is greater than or equal to the liquidity of the isolated pool.
    2)Opening positions is prohibited when naked positions exceed twice the liquidity of the pool.

Highly reliable market data

Due to the high volatility and liquidity instability of long-tail assets, isolated pools prioritize integrating price feeds from CEXs to avoid underperforming assets in the long-tail market as much as possible, thereby mitigating systemic risks to the protocol.Currently, the data sources integrated with Oracle include:
  • Binance
  • OkEx
  • KuCoin
  • LBank
  • BitGet
  • Gate.io
  • Mexc
These sources come from multiple, identity-verified, high-quality APIs. These APIs are aggregated into verified answers, eliminating any single point of failure. It's important to note that since Borabora is currently deployed only on the BNB Chain, it supports only assets that adhere to the BEP-20 standard for liquidity and margin assets. We believe that as the protocol is deployed across multiple chains, the types of asset networks supported will continue to expand. Regarding the integration of price feeds from DEXs such as Uniswap, Pancake Swap, Orca, DODO, and Trader Joe, we are currently in the research and discussion phase. Since this would be permissionless, it includes the following uncertainties:
  • The impact of different DEX infrastructures on price stability and accuracy.
  • The potential risk definitions and isolations for the derivatives market posed by spot liquidity.
For detailed information about market data, click here.

Parameter

Item
Value
Description
Minimum Opening Margin Value
$10
Ensures that positions can still be liquidated to pay LPs under extreme conditions
Maximum Leverage
100x
Set to increase traders' capital efficiency, with relatively controllable risk
Margin Rate
30%
Set to increase margin utilization, covering execution costs during liquidation
Price Slippage
Dynamic
Dynamic slippage set to control LP risk. Refer to dynamic slippage
Funding Fee Deviation Threshold
5%
Set to reasonably balance long and short positions, minimizing trader costs
The parameters of the isolated pools will be adjusted through community governance in the future to meet the diverse trading markets and the risk preferences of LPs.

Liquidity Certificate

Anyone can add liquidity to the isolated pools to become liquidity providers (LPs) and earn protocol income as well as profits from traders’ liquidation losses. The recognition of an LP is evidenced by the holding of LP tokens.
LP Token Pricing
Initial Pricing: The initial price of an LP token is the value of one unit of the base asset in the pool.
Post-Change Pricing: LP Token Price = Total amount of base pool assets / Total emission of LP tokens
LP Token Minting
Users can purchase LP tokens with assets supported by the liquidity pool on the deployed blockchain network, based on the price at the time of purchase to determine the amount of assets paid and the number of LP tokens obtained.
LP Token Transfer
Users can transfer the LP tokens they own. It is important to note that once LP tokens are transferred, the corresponding share of liquidity in the isolated pool is also transferred. Only the holder of the LP tokens has the authority to remove liquidity.
LP Token Burning
  • When LP tokens are burned, the corresponding amount of liquidity assets is obtained, and the amount received is related to the LP token price at the time of execution.
  • When placing an order to burn LP tokens, the processing time needs to be extended (currently set to T+3) to complete the order. This design is to prevent potential arbitrage that could harm LPs, thus affecting the interests of both liquidity providers and traders.
  • A redemption fee of 0.2% of the total redemption value will be charged when liquidity is removed by burning LP tokens.

Risks and benefits

LP Earnings:
  • 100% of traders’ liquidation losses.
  • 100% of the funding fees.
  • 50% of the trading fees.
LP Risks:
  • LPs act as counterparties to traders, holding naked positions with exposure to risk, which could potentially lead to losses.
  • Impermanent loss may occur due to market volatility affecting the value of the underlying pool assets.

Key Tips

  • Initial Liquidity: When creating an isolated pool, initial liquidity must be provided in order to successfully create the pool. The amount of initial liquidity required is $20 divided by the current price of the liquidity asset. The purpose of this design is to ensure that the liquidity pool (trading market) you create has the minimum trading potential.
  • Creation Time: After providing initial liquidity, your created liquidity pool will be deployed on the blockchain. This step may involve a waiting time, depending on the network environment of the current chain, which is approximately 10 to 20 seconds.
  • Creation Cost: Other than the initial liquidity and necessary gas fees, no other fees are required to be paid by you.
  • Potential Restrictions:
    1) The trading target assets (BTC/ETH/BNB) and liquidity pool assets (USDT) must be the same as those in the aggregated pool.
    2) An isolated pool with the same trading target asset and liquidity pool asset already exists.
    For example:
    a. Jack's attempt to create an isolated pool with BTC as the target asset and USDT as the margin (BTCUSD-USDT) fails due to restriction 1).
    b. If an isolated pool with TokenA-TokenA already exists, Jack's attempt to create another isolated pool with TokenA as both the trading target asset and liquidity pool asset fails due to restriction 2).
    c. Jack successfully creates an isolated pool with BTC as the target asset and TokenA as the liquidity pool asset (BTCUSD-TokenA), as it is not subject to any restrictions.