Crypto derivatives trading comes with certain risks. In order to provide the best trading experience for our clients as well as stability of the markets, we have implemented a liquidity pool. Designed to minimize the need to unwind futures positions, the futures liquidity pool provides an additional layer of security for derivatives trading and adds more integrity to our derivatives platform.
- Only available for USD Linear (multi-collateral) contracts
- Provides a safety net to decrease the possibility of unwinds and help profitable traders keep their profits in full
- Provides a safety net for assignment program by guaranteeing profitable assignments as long as funds are available
- In order to fund the pool, Kraken will fund it with a portion of revenue generated fees
- Assignments can have a minimum profitability of 0.5% and a maximum of 2.5%
What is the futures liquidity pool?
The liquidity pool is a pool of Kraken’s funds set aside to support our Equity Protection Process to increase book liquidations & assignments before an unwind occurs.
How is it funded?
We fund the liquidity pool using a portion of Kraken’s revenue. We reserve the right to determine in our sole discretion when and the amount of funds used for the benefit of users’ trading experience and market stability. We may also discontinue the liquidity pool at any time.
When is the futures liquidity pool applied?
While we retain discretion on when to apply the funds from the pool, our approach will generally be as follows:
Assignments - in order to add more stability to the assignment program, the liquidity pool helps to maintain the minimum/maximum profitability for assignment fills. The minimum profitability of an assignment fill is 0.5%, and the maximum will be 2.5%. This benefits assignment program liquidity providers.
Covered liquidations - Before an unwind occurs, the liquidity pool may be used to cover the difference between the zero-equity price and the best bid or ask in the order book. A covered liquidation fill in the order book that would otherwise be below the zero-equity price will instead be offset by any available funds in the pool in order to bring the balance up to zero. This benefits the platform and the counterparty by preventing an unwind.
How does it work?
Client B has a 20 ETH position in the PF_ETHUSD contract that has been liquidated, and 5 ETH of the position could not be liquidated in the order book. Let’s say the mark price for PF_ETHUSD is 2,000 and the zero-equity price for the position is 1,995, meaning that the profit for the assignment would be 0.025%, below the minimum profitability for the assignment.
In order to meet the minimum profitability of 1% for the liquidity provider, the liquidity pool would be used to cover the shortfall.
Client C, who is an assignment program liquidity provider, would see the fill price for their 5 ETH assignment fill as 1,980, resulting in 1% of profitability. The pool would be debited the shortfall amount of the position, which in this case would be 75 USD (15 USD * 5 ETH).
Using the previous example, let’s say that the Assignment Program could only fill 4 of the 5 PF_ETHUSD position and there was still 1 remaining. Let’s further assume that the best bid in the order book is 1,970, meaning that Client B would have a balance of -25 USD if filled at that price.
Instead of unwinding the position, the remaining 1 ETH would be liquidated in the order book at the best bid of 1,970, and the pool would be debited 25 USD.
What happens to assignments and unwinds if the liquidity pool has been temporarily exhausted?
Assignments - If there are no funds available in the pool at the time of the assignment, then the fill price will default to the zero-equity price.
Unwinds - If there are no funds available in the pool and no assignment program liquidity, then the remaining position will be unwound as documented in the Equity Protection Process.
Do I have to register to benefit from the futures liquidity pool?
No, the futures liquidity pool is not intended to be an individual benefit, but to be used generally to benefit all traders by providing a better trading experience and greater market stability. We intend to use the funds to support our Equity Protection Process for trades of USD linear futures.
Is the futures liquidity pool available for all contracts?
The funds in the liquidity pool will only be used for USD Linear futures (multi-collateral); they will not be used for Inverse futures. See the USD Linear contract specifications for detail on available contracts.