Liquidity
Last updated
Last updated
When users plETH and ybETH, they are trading against a liquidity pool.
The protocol supports any unlock price in the same contract through the ERC-1155 standard. However, liquidity is deployed to a particular unlock price, say for the unlock of ETH at $10,000. The same liquidity is used for trades of both plETH and ybETH. Neither token should ever trade above 1 ETH, so liquidity can be concentrated in the range of 0 to 1 ETH for each.
Liquidity providers benefit in two ways:
They earn standard LP fees from the pool
They receive incentives
As with any liquidity provision, there is risk of impermanent loss. In particular, once an unlock price is reached, the value of 1 plETH at that unlock price is exactly 1 ETH. You can use this information to calculate your impermanent loss, since you know the terminal price of the LP pool.
Both plETH and ybETH draw from the same underlying liquidity pool. The underlying liquidity pool pairs plETH at a particular price against ETH.
When a user buys plETH, his purchase goes through that liquidity pool.
When a user buys ybETH, the process is more complicated. A helper contract takes the user's ETH, obtains a flash loan, mints both into plETH and ybETH. The ybETH component is staked and transferred to the user. The plETH component is sold to pay off the flash loan.
Because both tokens draw from the same liquidity pool, the prices of plETH and ybETH move together. If the price of plETH at some unlock is 0.8 ETH, then ybETH at the same unlock is 0.2 ETH. If many people buy plETH at that unlock, the price will get pushed up to (for example) 0.95 ETH. This automatically drops the price of ybETH to 0.05 ETH.
Arbitrage ensures that neither plETH or ybETH can rise above a price of 1 ETH. This is because 1 ETH can always be minted into 1 plETH and 1 ybETH. If the price of either were to rise above 1 ETH, it would present a profitable trade for arbitrageurs.