Fluid Protocol


What is Fluid Protocol?

Fluid is a decentralized lending protocol where users can participate as lenders or borrowers in isolated lending pools. Fluid Protocol facilitates a new kind of leveraged yield farming experience for borrowers, with enhanced farming and vault rewards, while enabling lenders to earn a significant yield on supplied tokens without the risk of impermanent loss.

What is an Automated Market Maker (AMM)?

An Automated Market Maker (AMM) is a type of decentralized exchange protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, AMMs use liquidity pools that are pre-funded on-chain for both assets being traded.

What is a liquidity provider?

Liquidity providers supply tokens to decentralized exchanges (DEXs) and other DeFi protocols.

What are LP tokens?

When you provide liquidity to a DEX, you receive LP tokens as proof of contribution. For example, if you supply PLS and PLSX to PulseX, you will receive PLS-PLSX LP tokens in return. These LP tokens represent your proportional share of the total liquidity in the DEX for the token pair.
Whenever anyone swaps or trades on the DEX, a small trading fee is accrued to the liquidity pool as a reward for liquidity providers.

How do liquidity providers on DEXs earn yield?

Liquidity providers on automated market maker (AMM) DEXs such as PulseX earn yield from transaction fees and possibly staking rewards. Fluid enables borrowers and lenders to significantly dial up (or down) the risk (and rewards) of this yield, respectively.

What are farming / staking rewards?

DEXs sometimes offer farms or staking pools allowing liquidity providers to stake their LP tokens and earn additional reward tokens. These farms provide an additional incentive to liquidity providers and help to offset the risk of impermanent loss. For example, PulseX allows users to stake their LP tokens to earn Incentive Token (INC).

What is impermanent loss?

Impermanent loss is one of the principal risks associated with being a liquidity provider.
The value of an LP token is always backed 50-50 by the underlying tokens in the token pair. Due to the nature of AMMs / constant-product market makers to uphold this ratio, a significant swing in the price of the underlying tokens relative to each other can result in a greater loss to liquidity providers compared to simply holding the tokens, assuming the liquidity is removed at that moment. (Hence, the loss is “impermanent.”)

What is leveraged yield farming?

Leveraged yield farming represents an innovative feature in Fluid that grants liquidity providers the opportunity to utilize their Liquidity Provider (LP) tokens as collateral for loans, permitting them to accumulate even more LP tokens. The underlying expectation here is that the rewards yielded from owning a higher number of LP tokens - which stems from supplying additional liquidity to the DEX and subsequently earning further yield and farming rewards - will surpass the cost of borrowing.
Fluid's distinct model for LP token collateralization, coupled with its carefully engineered liquidation mechanics, paves the way for yield farming positions with substantial leverage. However, it's crucial to note that leveraged yield farming inherently magnifies the risk of impermanent loss, making it essential for participants to carefully assess their risk tolerance and strategy.

What is indirect liquidity providing?

Lenders in Fluid indirectly provide liquidity by making their tokens available to borrowers for leveraged yield farming. Lenders do not risk impermanent loss with their supplied tokens, as the risk of impermanent loss is transferred to borrowers in the Fluid Protocol.

What is TVL?

Total value locked (TVL) is a useful metric for DeFi protocols. TVL measures the amount of tokens locked in a protocol at a given time. Fluid includes the following elements in TVL calculations:
  • Total collateral in lending pools (including initial collateral and leveraged positions)
  • Total excess supplied tokens (i.e. that are not borrowed, since borrowed tokens are already accounted for in total collateral or not locked in the protocol)

What is a price oracle?

A price oracle is any contract that provides on-chain access to price information for a token, usually denominated in terms of another token or an off-chain unit of account. Virtually every decentralized lending protocol requires timely and accurate on-chain prices in order to determine the value of collateralized loans, as well as to prevent borrowers from withdrawing more than the value of their collateral at any time.