Liquidity Pools
What is a Liquidity Pool?
Liquidity Pool's are investment instruments that employ a specific set of strategies for yield farming. They make use of automation to continually invest and reinvest deposited funds, which help to achieve high levels of compounded interest. By using a Capella liquidity pool to compound your gains, you save thousands of transactions with their associated gas costs, and precious personal time. Instead of manually harvesting and selling rewards, buying more tokens, and reinvesting that continuously, a vault does all that automatically at a high frequency.
Liquidity Pool's are the core of the Capella.Finance ecosystem. In a Capella pool, you earn more of the asset you stake in it, and could always withdraw from a vault at any moment in time.
Capella.Finance also does not own user funds staked in vaults. However, it is generally best to view vaults as investment tools to store funds for the medium to long term in order to have the effects of compounding really kick in.When browsing the vaults on the platform, you will see the annual percentage yield (APY), which takes the frequent compounding into consideration compared to annual percentage rate (APR) which does not. You will also see daily interest percentages and the total amount invested in a vault by all users (TVL). Furthermore, one can see what underlying platform the vault is using as a source of revenue.Each vault can either refer to a pair of tokens invested in liquidity pools, such as BUSD-BNB LP tokens within the Binance Smart Chain ecosystem, or a single token invested in lending platforms or single stake reward pools. After depositing tokens to a vault, the user is supplied with vault specific Liquidity Pool Tokens which represent their share in the Liquidity Pools.
Liquidity Pool Tokens :
1) Stable Pool (SP)
2) Coin Pool (CP)
3) Dex Pool (DP)
Summarizing, Liquidity Pools can:
Efficiently execute yield farming strategies.
Compound rewards into the initially deposited token amount.
Use any asset as liquidity.
Provide one asset as collateral for another.
Manage collateral at a safe level to mitigate liquidation.
Put any asset to work to generate a yield.
Reinvest earned profits.
Users can sit back and relax, and watch their investment grow!
What are LP Tokens?
A Liquidity Pool Token (LP) is an interest-bearing, tokenized proof of deposit that you will receive at the moment you deposit in a Capella vault. LP is unique per vault, e.g. you get SP (Stable Pool) tokens when depositing USDT into the Stable Pool vault. One can view SP Tokens as the receipt of your vault deposit. Capella.Finance users should hold on tightly to their SP Tokens and not sell or exchange it, since you would lose ownership of your staked vault assets if you did so!
How do LP Tokens earn interest?
Capella's vaults automatically create more of your deposited asset in the form of compound interest. By holding LP Tokens in your wallet, they are increasing in value against its corresponding vault asset. The number of LP Tokens in your wallet will remain constant, but the quantity of the vault tokens they can be redeemed for increases. This is also the reason why LP Tokens do not 1:1 match with the token amount initially deposited.
How do I redeem LP Tokens for the initially deposited tokens?
Whenever you want to withdraw the tokens that are staked for you in Capella's vault, you simply initiate a withdrawal transaction to exchange them. The LP Tokens are then taken from your wallet and burned, and your deposited assets plus yield will be given back to you.
What are the advantages of the LP Token system?
Capella's LP Token system has a few major advantages:
LP Tokens allow any user to withdraw their fair share of deposited funds;
The system allows you to deposit the LP Token receipt to a cold or hardware wallet for ultimate safety;
Your privacy is maintained, as you remain anonymous to Capella. Your funds in the vault are not tied to the wallet address from which you made the deposit, since the LP Tokens are the only evidence of your share in the vault. Therefore, you could withdraw your share of funds from a different address if you moved your LP Tokens to it;
LP Tokens have tax benefits: since you're not selling off rewards, nor getting staking rewards direct to your address, you do not have taxable events when you have funds staked in a vault;
Lastly, LP Tokens can be used as interest-bearing collateral.
How often do the vaults harvest their profits and reinvest?
Vaults are normally harvested multiple times daily and profits are automatically reinvested (compounded).
Why can't someone just do this themselves?
They could, but Liquidity Pools help you save on personal time and transaction fees, maintain healthy collateral to debt ratios, self-optimize for the best possible yields, and automatically reinvest earnings. Attempting to do this manually would result in large inefficiencies. At Capella we like to say: "Sit back and relax, the LP does all the work for you."
What is the vault fee structure?
Liquidity Pools have a performance fee structure, taking 25% of harvest rewards. All 25% on profits is distributed back to the $CAPE stakers. The fees are already built into the APY of each vault and daily rate. You do not need to calculate these yourself. The performance fee on additional yield i.e. vault profits is distributed back to $CAPE stakers and is the main source of Cape.Finance's platform revenue. A part of it also funds the Governance Treasury which is used to further fund platform development and security and other initiatives. The performance fee was also implemented to promote community engagement and governance participation. A successful and engaged community is critical for our future growth, which in-turn rewards platform users even more.Furthermore, vaults have withdrawal fee. The main purpose of this fee is to prevent possible exploits from bad-faith actors. Without the fee, somebody could deposit just before the harvest() function execution and withdraw straight after that event, taking a % of the gains generated by legitimate stakers. Withdrawal fees stay in the vault and are shared amongst vault funds.
Does the performance fee get taken out when I withdraw my funds?
No, the performance fees are on profits and are taken every time someone calls the harvest function.
Does the vault page show the APY?
Yes. Our displayed APY values reflect the predicted rate earned on a vault in a year. This rate is determined by the underlying platform it uses, the strategy that it is interacting with at the time, the total amount of funds in the vault and also takes into account the effect of compounding. As a unique feature, we have also included all vault fees in the APY calculation. What you see is what you get!
What risks do the Liquidity Pools have?
Capella LP Tokens are audited, but this does not mean that a vault is entirely risk free. Below are some of the general vault risks:
Assets deposited into the vault have no risk of decreasing in quantity but can decrease in monetary value.
As with any smart contract, the ultimate risk is that an investor's funds can end up stolen or unable to be withdrawn. The team does take steps to quantify the security risks of smart contracts and only will interact with ones that meet a specific set of requirements after excessive testing to make sure the underlying platform does not contain so called 'rug-pull' functions.
What are the different vaults?
Money Market : Utilizes lending platforms, such as Venus on BSC, to generate the highest possible yield for these coins (e.g. BUSD, BNB, LINK, DOT, DAI, USDT, ETH, or BTCB).
Native Token Farming : Takes advantage of the high yield on popular farms by depositing another asset to earn, sell and compound profits of the native reward token.
What will I get out when I make a LP withdrawal?
You will always withdraw the token type that you deposited, because at Capella Finance you earn what you stake. You will get the amount you deposited plus the yield generated minus the vault withdrawal fees.
How often are balances updated in the vaults?
Pending rewards are not reflected in the balance until they are swapped for the initial deposited token. This can vary depending on the strategy running.
How do vaults get added to Capella.Finance?
New potential vaults can be discussed in our Discord in the #whiteboard channel. Our strategists then add the potential investment strategy to our strategy list. A priority is assigned to each new, potential strategy based on its APY, TVL and sustainability. Our developers/strategists then attack the list from top priority to bottom. The official forum is used for submitting actual vault requests.
Last updated