Example: Private Liquidity Pools & Open Market Liquidity Pools

To understand the power and stability of Private Liquidity Pools, let's compare them to ordinary liquidity pools using a visual example.

Open Market Liquidity Pool

Initial State:

• Total Value: 1000 USD

• Composition: 500 USDT + 500 FUSD

Scenario: Withdrawal

• Withdrawal: Liquidity providers withdraw 200 USDT.

• New State: 300 USDT + 500 FUSD.

Price Impact:

• Initial State Calculation:

  • K = 500 USDT * 500 FUSD = 250,000.

• New State Calculation:

  • New USDT: 300.

  • FUSD Price: 250,000 / 300 USDT = 833.33 FUSD.

  • Price per FUSD: 300 USDT / 500 FUSD = 0.60 USD per FUSD.

Result:

• The FUSD price drops to 0.60 USD, leading to a de-pegging situation due to the imbalance caused by the withdrawal.

Private Liquidity Pool

Initial State:

• Total Value: 100 USD.

• Composition: 50 USDT + 50 FUSD.

Withdrawal Rules:

• Withdrawals or swaps for USDT are not allowed if the FUSD price drops below 1 USD.

Scenario: Withdrawal

• Restricted Actions: No withdrawal of only USDT or swapping for USDT below 1 USD.

• New State: The pool remains balanced.

Result:

• The FUSD price remains stable because the system prevents actions that would de-peg it.

Power and Incentives

• Long-Term Semi-Arbitrage: The price mismatch in ordinary pools creates arbitrage opportunities in private pools, attracting more liquidity to the stable pool.

• Fedz Incentives: The Fedz clearing house can subsidize new private LP tokens, further encouraging stability and growth within the private pool.

Conclusion

This example demonstrates how Private Liquidity Pools are designed to maintain the stability of FUSD. By restricting certain actions and providing incentives, these pools ensure a stable and reliable environment, especially during high demand periods. This makes them a vital component of The Fedz ecosystem.