💹LP token value and Fee sharing

Fee sharing is a feature that the protocol can enable to distribute a portion of trading revenue to LPs.

Before fee sharing is enabled, trading fees are accumulated in the pool without being reflected in the value of LP tokens. This creates a pool surplus reserve where the overall coverage ratio is >=100%, which serves two key purposes:

• Provides a buffer to absorb adverse market events or extreme coverage imbalances.

• Enables a fee-less trading zone, since tokens with a coverage ratio greater than 100% can be traded without incurring additional fees.

Once fee sharing is enabled, newly generated trading fees will start to increase the liabilities directly. As a result, the LP token value relative to the underlying token will continuously rise, creating a base yield for liquidity providers on top of extra token incentives.

In the future, once governance is enabled, the community will be able to:

• Determine the portion of fees to be charged.

• Decide how fees are distributed between LPs and ve-token holders.

Initially, one LP token is equivalent to one unit of the underlying token. In other words, one LP token can redeem one underlying token, assuming the coverage ratio remains at 100%. At this stage, the total supply of LP tokens matches the total liability of the pool.

As the protocol generates trading fees over time, the total liability of each token begins to exceed the corresponding LP token supply. This leads to a gradual increase in the intrinsic value of LP tokens relative to the underlying assets. For example, if there are 100 LP tokens outstanding but the pool has accrued a total liability of 102 tokens, then each LP token effectively represents 1.02 underlying tokens — a 1:1.02 ratio — assuming full coverage.

Definition - 5.1 LP Token Value Against Underlying Token

$$\text{LP token value} = \frac{\text{Total liability}}{\text{LP token total supply}} * \text{Underlying token value}$$

In summary, the design of the LP token mechanism ensures that liquidity providers benefit naturally from trading activity, as their LP tokens appreciate in value over time. By carefully managing the timing of fee sharing and maintaining a surplus reserve, the protocol provides both enhanced yield potential and greater systemic resilience. These mechanisms create a sustainable foundation for aligning the long-term interests of liquidity providers, token holders, and the protocol as a whole.