We are excited to introduce Drift Liquidity Provider (DLP)!
Users can now become liquidity providers with Drift’s DLP, adding liquidity to the perpetual market of their choice to increase liquidity depth and collateralisation.
- a pro-rata proportion of the fees generated by the exchange; and
- funding payments for settled position
With DLP, anyone can participate in market making on Drift. By contributing liquidity to a perpetual market, you’ll take on a share of the vAMM’s fills as a counterparty to Drift traders. As new trades are filled, your LP positions are automatically adjusted by the vAMM.
- Pick the perpetual market to provide liquidity,
- Choose the amount of liquidity to provide (liquidity can also be provided with leverage up to 10x),
- DLP will start to provide liquidity for the selected perp markets.
How does Drift’s DLP Differ from GMX’s GLP?
There are 3 key differences between DLP and GLP:
The performance of GLP is tied to the price of the token. When you buy GLP, you can expect the same performance as someone else who also bought GLP. One of the unique features of Drift’s DLP is that performance is unique to each user based on the time the user entered.
GLP is the single counterparty for GMX traders, while the DLP contributes to the vAMM — one of three liquidity mechanisms on Drift. Drift’s liquidity mechanisms are comprised of the vAMM, DLOB (decentralized limit order book), and JIT (Just-In-Time Liquidity) to provide traders with the best on-chain liquidity.
Drift’s DLP allows users to customise which market they’d like to provide liquidity for whereas with GLP you are the counterparty for all markets on GMX.
How does DLP work?
LPs take on opposing positions from new trades taken against the vAMM by traders on Drift. Consequently, DLP effectively engages in an active liquidity provision strategy without LPs having to manually manage their positions.
The liquidity provided is represented by DLP shares and is comparable to collateral consumed by open unfilled orders. DLP shares do not translate to a max position size the user can acquire. For example, if an LP starts providing 10% of the liquidity to the vAMM in the SOL market, and then a taker opens a 10 SOL long position, then the LP will receive a 1 SOL short position, plus fees earned for the trade.
Users can provide liquidity with leverage up to 10x (total account leverage) to the markets of their choice. However, the margin system determines the maximum leverage a user can utilise, just like the margin system imposes maximum leverage on each perpetual market. The amount of margin available for LPs is calculated as a combination of a user’s current unsettled position and its open orders. Providing liquidity with leverage is optional and will increase an LP's risk of liquidation. LPs under 1x leverage still put the account at risk of full liquidation.
A total of 80% of the fees gathered by the vAMM are distributed among DLP depositors based on the proportion of liquidity each LP has provided to the vAMM. LPs also receive funding and any P&L from settled LP positions. Returns are reflected in your unsettled/settled P&L — because of this, we encourage users to create a sub-account for DLP to easily keep track of trading and DLP P&L.
What are the Risks?
Although there is potential for gains by becoming an LP, it does come with risks. DLP is an advanced product offering from Drift that adds directional exposure in perpetual markets. We encourage users to research the opportunities and risks that come with being an LP on Drift.
There are no guarantees that positions taken on by LPs won’t lead to losses. Since the vAMM actively takes positions in the market it is possible that positions taken by the vAMM can lead to losses.
It is recommended that users create a separate subaccount when depositing into the DLP to further isolate the risks associated with becoming an LP.
Get started with DLPs here: https://app.drift.trade/DLP
To check the historical performance of LPs (which is also visible on Drift’s UI) see here: historical performance
For more information and for a technical explanation of how DLP works, including the code breakdown please visit the Drift docs at this link: https://docs.drift.trade/liquidity-providers-lps