Liquidity providers and holders of Dominance Pair tokens take on certain risks. Please learn about them before depositing liquidity or opening a position. If something isn't clear, our team is happy to answer questions in the Discord #support channel.
When you open a long or short position or add unbalanced liquidity, you own long or short tokens. The value of these tokens will increase or decrease as dominance fluctuates. For instance:
- If you hold ETHDOM but Ethereum dominance decreases, you will lose money.
- If you provide invBTCDOM liquidity but Bitcoin dominance increases, you will lose money.
Index Price vs Market Price
At any point in time, there are two prices for a dominance token. One is the "index price", determined by the market dominance reported by CoinGecko and shown on the Domination Finance graph. The other is the "market price", determined by traders buying and selling dominance tokens. These two prices will converge because tokens can be redeemed for the index price after expiry.
If you add liquidity when the market price has drifted from the index price, you will experience impermanent loss if the market price returns to the index price. Make sure the market price is correct before you add liquidity.
Zero Price Risk
As a token's price nears 0, the value of that token's liquidity pool quickly becomes 0. If ETH dominance reaches 40% or USDT dominance reaches 6%, this could happen to providers of invETHDOM and invUSDTDOM. Liquidity providers could mitigate losses by withdrawing from the pools once dominance neared these limits. Based on historical dominance values, we think this is unlikely to occur.
First, read Concepts: Impermanent Loss.
Providers of balanced liquidity experience less impermanent loss than providers of unbalanced liquidity. "Balanced liquidity" means a position with the same number of long and short tokens. For instance, a position of 50 BTCDOM and 50 invBTCDOM can be redeemed for 5000 USDC no matter the current Bitcoin market dominance.
Fig. 1: Balanced Liquidity
Liquidity value versus Bitcoin dominance, for balanced liquidity added at 40% Bitcoin dominance. A balanced position has constant value if it isn't added as liquidity, so this graph is also a graph of IL.
Fig. 2: Unbalanced Liquidity
Liquidity value versus Bitcoin dominance, for BTCDOM-USDC liquidity added at 40% Bitcoin dominance. This unbalanced liquidity is effectively a speculative position.
Before providing liquidity, you should assess market conditions and decide how much impermanent loss you're willing to accept.
You can use this calculator to simulate the performance of your pooled liquidity without trading fees and liquidity incentives. Input the size of your deposit as c, the pair's price ceiling as Dmax, and the current dominance percent as Dcurrent. The graph will show v, the value of your liquidity, versus dominance.
Manually Calculating IL
Imagine you provide 8000 USDC of balanced liquidity when Ethereum dominance is at 17%. Half the USDC is spent to mint 100 ETHDOM and 100 invETHDOM. The other half is added to the liquidity pools alongside those tokens.
Your pooled tokens:
- 100 ETHDOM and 1700 USDC (17 USDC per ETHDOM)
- 100 invETHDOM and 2300 USDC (23 USDC per invETHDOM)
Your pooled tokens:
- 82.4 ETHDOM and 2061.6 USDC (25 USDC per ETHDOM)
- 123.8 invETHDOM and 1857.4 USDC (15 USDC per invETHDOM)
After the price change, your liquidity is worth only 7837.9 USDC. Your impermanent loss is 2.0%.
Domination Finance is powered by smart contracts on Ethereum, Polygon, and Boba. Our Vault contract sends deposits to and from liquidity pools on Uniswap, Quickswap, and OolongSwap. The dominance tokens created from your deposit are UMA Long Short Pairs, and depend on UMA's governance and oracle contracts. Finally, USDC itself is a smart contract. A flaw in any of these smart contracts could lead to loss of funds. All of Domination Finance's contracts are professionally audited by a third party before production deployment.
Domination Finance is a part of the larger ecosystem of decentralized finance. Failures of related systems can affect your funds, and external events like new cryptocurrency legislation can have unexpected effects beyond their direct impact on price.
At expiry, the prices of long and short tokens are decided by calling UMA's Optimistic Oracle. If there's a dispute, honest UMA holders vote for the correct dominance value as specified by UMIP-69. A sudden drop in the price of the UMA token could make it easier for an attacker to buy voting power. See UMA's documentation for more information about the oracle.
All Dominance Pairs are collateralized by USDC. USDC is guaranteed by the Centre Consortium to be exchangeable 1:1 for US dollars. However, if something were to happen to Centre Consortium (Coinbase and Circle) or the legal status of stablecoins, your funds could be at risk.