Protocol Rules

# Liquidity Provider Rules

Liquidity providers deposit collateral into pools and define the funding rate at which their liquidity becomes active.

Liquidity providers back trader profit and loss. They earn funding rate and swap fees when their liquidity is active, but they are also exposed to trader PnL.

See Liquidity and Funding Rate for the higher-level explanation.

S&F's LP thesis is not that LP risk disappears. The thesis is that LPs underwrite transparent protocol risk instead of opaque venue risk.

The rules for collateral, funding rate, oracle settlement, active liquidity, and black swan debt are protocol rules. They are not supposed to depend on a venue operator, an offchain balance sheet, a bridge custodian, or a discretionary liquidation system.

Pools use concentrated liquidity arranged around funding-rate ticks. Each tick represents a basis-point range of yearly funding rate.

The tick range starts at -604460 and ends at 604460, or -6044.6% to 6044.6% per year. A funding rate can be negative, in which case the liquidity provider pays the trader to hold the synthetic asset.

A liquidity provider position can be inactive, partially active, or fully active.

Example:

Alice deposits 1 ETH into the S-USD pool at a 1% funding rate, or in the 100th tick of the pool. The S-USD pool is currently at a 1% funding rate. Alice's liquidity is immediately active, but if liquidity in the 100th tick is only partially used, Alice's position is partially active too.

To be fully active, Alice would need to outcompete the current funding rate by depositing below the 100th tick. That reduces the current funding rate in the process.

Liquidity positions are auto-compounded. Funding rate, swap fees, and trader PnL are reflected directly in the value of the liquidity position.

# MEV protection

Because liquidity providers are exposed to trader PnL, they may have an incentive to enter or exit the active range before a trader settles PnL.

A liquidity provider with mempool access could try to extract MEV by entering or exiting at the right time. To discourage this, liquidity providers follow a two-step entry and exit process.

If a liquidity provider fails to claim at the next price, the deposit or withdrawal can be canceled.

This process can be automated through an approved third party or a smart contract.

# Funding rate

Please refer to the fee section for more information about the funding rate.

# What LPs are underwriting

LPs provide the collateral that backs trader exposure.

They can earn funding rate and swap fees, but they also absorb trader PnL and pool-level stress. In extreme markets, black swan rules define how pool debt affects exits.

The LP guarantee is not "no loss." The guarantee is that the risk is explicit, contract-defined, and not controlled by a venue operator after deposit.