LP Guide
Own LPing 101: How Liquidity Provision Works in Own Protocol
What Is LPing in Own?
In Own Protocol, Liquidity Providers (LPs) enable synthetic exposure to real-world assets like stocks by committing capital to on-chain asset pools.
Users gain exposure by paying a floating interest rate, and LPs earn this yield in return for underwriting that exposure.
At its core, LPing in Own is modeled on a Total Return Swap (TRS):
Users receive the asset’s performance.
LPs earn interest for offering that performance, and optionally market-making profits during rebalancing.
Understanding LP Commitment vs LP Collateral
In Own Protocol, when you provide liquidity as an LP, you're not depositing your entire committed capital on-chain. Instead, the protocol is designed for capital efficiency, where only a portion of your commitment is actively used, and the rest is kept off-chain under your management.
Let’s break down the two key concepts using the example of LP3:
LP Commitment = Your Total Capital Pledged to the Pool
This is the full amount you’re allocating to the protocol — even if it’s not all used right away. It determines your ownership share of the pool and the amount of synthetic asset exposure you’re expected to support.
For example: If you commit $100,000. That’s your total capital set aside for Own.
This capital will be split between:
Asset exposure (off-chain)
Collateral (on-chain)
Idle capital (unused)
LP Collateral = The On-Chain Margin You Deposit
Out of your committed capital, you only deposit a portion on-chain — this is the collateral. It acts as a security buffer that the protocol may use only if the LP fails to rebalance their position. It is not used directly for backing the asset or daily rebalancing.
For example:
If you’re responsible for 333.33 units of synthetic asset at a price of $100
→ Exposure = $33.33K
With a 30% collateral ratio, your on-chain deposit is:
→ $33.33K × 0.3 = $9,999.9
So even though you committed $100K, you only deposit ~$10K on-chain as collateral, while $33.33K is used to buy the real asset off-chain, and the rest remains idle.
Capital Allocation Summary
Committed Capital
$100,000
Total capital pledged to the pool
Off-Chain Asset Buy
$33,333.33
Used to buy the real asset (to stay delta-neutral)
On-Chain Collateral
$9,999.9
Safety buffer if LP fails to rebalance
Capital Utilised
$33,333.23
Actively used capital (33.3%)
Idle Capital
~$66,666.67
Idle, flexible capital for future scaling
Key Takeaway
LP Commitment determines your pool share and exposure responsibility.
LP Collateral is posted on-chain but is only accessed if you fail to rebalance.
Rebalancing and backing the asset is your active responsibility from the capital committed.
Your earnings (yield) is based on how much asset you are backing, not your full commitment.
Rebalancing & Delta-Neutrality
Every market day, the protocol rebalances based on asset price changes.
If the asset price rises:
Users’ exposure is marked up.
LPs owe that increase — but if they’ve bought the asset off-chain, their external holding offsets this liability.
This is how LPs stay delta-neutral — no directional risk, just net floating yield.
LPing in Practice — A Step-by-Step Example
Initial Pool State
LP1 & LP2: $250K each committed → Total = $500K
Asset price = $100
Users have minted 2,000 synthetic units → Synthetic value =
$200KCollateral ratio = 30%
Utilised capital =
$200K (asset value) + $60K (30% collateral)
Utilisation Ratio = $200K / $500K = 40%
LP3 Enters with $100K
You join the pool. Now:
Total commitment = $600K
Your share =
100K / 600K = 1/6→ 16.67%You’re backing 1/6 of 2,000 units = ~333.33 units
Synthetic exposure =
333.33 × $100 = $33.33K
You allocate:
$33.33K → Buy asset off-chain
$10K → Deposit on-chain as collateral ➡️ Utilisation = $33.3K / $100K = 33.3%
If Asset Price Increases to $110
Now:
Synthetic exposure =
333.33 × $110 = $36.66KValue increase = $3,333.3
Rebalance requires LP to cover this increase
But your off-chain asset also appreciated by $3,333.3 → no loss. ➡️ You remain delta-neutral.
New utilisation = $36.66K
Utilisation = 36.66%
If Asset Price Decreases to $90
Now:
Synthetic exposure =
333.33 × $90 = $30KValue decrease = $3,333.3
LP claims this amount from the pool via rebalance
Your off-chain asset also lost $3,333.3 in value, so again — no net PnL impact. ➡️ You remain delta-neutral.
New utilisation = $30K
Utilisation = 30%`
Capital Efficiency & Yield
The goal of all LPs is to collectively commit just enough capital so the pool’s utilisation stays in the optimal range (e.g., 40–80%).
Why?
If underutilised, your capital sits idle and earns nothing.
If overutilised, the system becomes risky and may reject new minting.
Important: LPs earn yield only on the capital that is deployed to back user exposure (i.e., asset). Unutilised capital does not earn interest.
Risks to Keep in Mind
Price Rebalance Risk
LPs must keep rebalancing in sync with asset prices
Poor Hedging Execution
Misaligned off-chain hedging leads to exposure
Overcommitting Capital
Low utilisation = low yield
Automation Dependence
Active management is required
Active vs Passive Management
On volatile market days, there are significant market-making opportunities — LPs can profit from rebalancing activity and spreads.
On calm days, rebalancing can be automated using:
AI agents
Web3 bots (e.g. Chainlink Functions or Tenderly)
Delegate vaults (planned)
Sustainability
Yield is driven by real user demand, not token incentives.
LPs are fully collateralized and optionally delta-hedged off-chain.
Supports both fully-backed and purely synthetic pools depending on LP preference.
Optional zk-proofs can verify off-chain asset holdings for institutional confidence.
TL;DR
Yield Source
Floating interest from user exposure
Delta-Neutral
Yes, via off-chain hedging
Management Style
Active, with optional automation
Capital Utilisation
Earns yield on utilised capital (exposure + collateral)
Goal
Commit capital so pool utilisation stays optimal for high yield
Sustainability
High — no reliance on emissions or inflation
Last updated