💡How it works
What makes ELMO special?
Basic Leveraged Full-Range Liquidity Provisioning
The original leveraged LP is a V2-style position which adds liquidity everywhere. Depending on the amount of leverage, there is a price at which the position will liquidate. Thankfully, V2 positions have low volatility so users can usually avoid liquidation in normal market conditions.
In total, users earned a multiple of their trading fee and paid a much smaller borrow fee for accessing leveraged.
Naive Leveraged Concentrated LP
If someone just naively lets users borrow against their Concentrated (V3) LP position, the risks become much higher.
Similar to the V2 scenario, there is a price or prices at which the LP gets liquidated. The problem is concentrated LPs often go in and out of range. That's the point of concentrating! You're betting on a much more narrow price band which is often wrong, but the increased fee returns make that worth it. Liquidating your position as soon as it goes out of range completely defeats the purpose of concentrated LPs.
This is why we built this on Itos, the first protocol to enable Hedged LPs.
Leveraged and Hedged Concentrated LPs
By using Itos, we can automatically hedge the tails to prevent those liquidations. Now an LP position can go in and out of range without issue. There is of course the cost of the hedges. These hedges are Itos's Takers, which works like an inverse LP, automatically paying trading fees when the price is in range.
So in total the behavior is,
When in LP range, earn leveraged fees.
When at the edges, pay leveraged hedging fees.
When totally out of range, don't pay or earn any trading fees.
Always pay a minor borrow cost.
The LP position's principal value still goes up and down according to the price (it still rebalances).
So the Best Case scenario is
The price stays in your LP range.
The price goes back to your original starting price.
No principal losses, earned leveraged LP fees, pay a much smaller borrow cost.
The Worst Case scenario is
Immediately goes to the edge of the LP range and stays precisely there, paying lots of hedging fees.
Total principal loss (which can recover is the price moves back), the price range was completely wrong and the price never comes back into range.
Liquidation can only happen if the fees paid gets too big, not if the price goes out of range.
So you can see, sometimes its better to just let the price go out of range and wait for it to recover.
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