We are excited to introduce Backstop AMM Liquidity (BAL)!
Users can now become liquidity providers with Drift’s BAL, adding liquidity to the perpetual market of their choice to increase liquidity depth and collateralisation.
BALs earn:
- a pro-rata proportion of the fees generated by the exchange; and
- funding payments for settled position
With BAL, anyone can participate in market making on Drift. By contributing liquidity to a perpetual market, you’ll take on a share of the vAMM’s fills as a counterparty to Drift traders. As new trades are filled, your LP positions are automatically adjusted by the vAMM.
- Pick the perpetual market to provide liquidity,
- Choose the amount of liquidity to provide (liquidity can also be provided with leverage up to 10x),
- BAL will start to provide liquidity for the selected perp markets.
How does Drift’s BAL Differ from GMX’s GLP?
There are 3 key differences between BAL and GLP:
P&L Performance
The performance of GLP is tied to the price of the token. When you buy GLP, you can expect the same performance as someone else who also bought GLP. One of the unique features of Drift’s BAL is that performance is unique to each user based on the time the user entered.
Liquidity Mechanism
GLP is the single counterparty for GMX traders, while the BAL contributes to the vAMM — one of three liquidity mechanisms on Drift. Drift’s liquidity mechanisms are comprised of the vAMM, DLOB (decentralized limit order book), and JIT (Just-In-Time Liquidity) to provide traders with the best on-chain liquidity.
Customisability
Drift’s BAL allows users to customise which market they’d like to provide liquidity for whereas with GLP you are the counterparty for all markets on GMX.
How does BAL work?
LPs take on opposing positions from new trades taken against the vAMM by traders on Drift. Consequently, BAL effectively engages in an active liquidity provision strategy without LPs having to manually manage their positions.
The liquidity provided is represented by BAL shares and is comparable to collateral consumed by open unfilled orders. BAL shares do not translate to a max position size the user can acquire. For example, if an LP starts providing 10% of the liquidity to the vAMM in the SOL market, and then a taker opens a 10 SOL long position, then the LP will receive a 1 SOL short position, plus fees earned for the trade.
Users can provide liquidity with leverage up to 10x (total account leverage) to the markets of their choice. However, the margin system determines the maximum leverage a user can utilise, just like the margin system imposes maximum leverage on each perpetual market. The amount of margin available for LPs is calculated as a combination of a user’s current unsettled position and its open orders. Providing liquidity with leverage is optional and will increase an LP's risk of liquidation. LPs under 1x leverage still put the account at risk of full liquidation.
A total of 80% of the fees gathered by the vAMM are distributed among BAL depositors based on the proportion of liquidity each LP has provided to the vAMM. LPs also receive funding and any P&L from settled LP positions. Returns are reflected in your unsettled/settled P&L — because of this, we encourage users to create a sub-account for BAL to easily keep track of trading and BAL P&L.
What are the Risks?
Although there is potential for gains by becoming an LP, it does come with risks. BAL is an advanced product offering from Drift that adds directional exposure in perpetual markets. We encourage users to research the opportunities and risks that come with being an LP on Drift.
There are no guarantees that positions taken on by LPs won’t lead to losses. Since the vAMM actively takes positions in the market it is possible that positions taken by the vAMM can lead to losses.
It is recommended that users create a separate subaccount when depositing into the BAL to further isolate the risks associated with becoming an LP.
Getting Started
1. To start providing liquidity, you can visit the BAL page here: https://app.drift.trade/BAL
2. Select the perpetual market you want to provide liquidity for
- You can view each market's performance by clicking on the 7D and 30D return
- For a more detailed view (which is also accessible on the UI), click here: historical performance
3. By clicking the "Add Liquidity" button, you'll be presented with a modal where you can input how much liquidity you want to provide to that perpetual market. When you add liquidity, a new subaccount called "Drift Liquidity Provider" will be created so you can track and manage your positions/P&L easily.
4. After you add liquidity, the page will update at the top to show the markets you've provided liquidity to and whether or not you have open LP positions. You can add and remove liquidity at any time, or close the position via the Trade page.
For more information and technical explanations of how BAL works, including the code breakdown please visit the Drift docs at this link: https://docs.drift.trade/liquidity-providers-lps
