The Omni Liquidity Provider (OLP)
Last updated
Last updated
The Omni Liquidity Provider (OLP) is a vertically integrated liquidity provider that ensures the liquidity of each new listing by offering quotes.
OLP can be broken down into three key components: the vault, the market making engine, and the risk management system.
The vault is a smart contract where the capital that powers OLP (currently just USDC) is secured. The vault is the "hub" of OLP, where all OLP deposits are routed to. The vault is the source of OLP's margin, and is also where OLP's market making profits are accumulated and subsequently distributed as yield.
OLP runs a sophisticated market making strategy on Omni, which is responsible for generating competitive price quotes and acting as the counterparty to every trade executed on Omni. OLP runs proprietary, in-house algorithms that analyze real-time data (such as flow and volatility) from CEXs and on-chain sources to determine fair prices. The market making engine's primary objective is to maintain incredibly tight spreads on majors, and as-tight-as-possible spreads on long-tail assets.
OLP's risk management is crucial to its goal of maintaining strong and consistent yield for depositors. OLP uses proprietary in-house algorithmic strategies to manage and hedge its positions to mitigate directional risk exposure and optimize long-term yield.
A key difference from Omni's design compared to other platforms is that OLP is the only market maker on Omni. This brings a variety of benefits to both the platform and depositors.
Capture All Spread Revenue: With no external market makers on Omni, all revenue captured from the spread is retained by OLP. Omni is a closed loop ecosystem, where all money deposited to the platform remains in the Variational ecosystem until withdrawn.
Zero Fees: Because OLP doesn't leak spread revenue to external market makers, the Variational protocol can take a volume-based percentage of OLP's revenue as opposed to requiring additional fees on each user trade.
Loss Rakebacks: By combining OLP's positioning as the sole counterparty to all trades on Omni with a robust external hedging process, OLP essentially gains one dollar for each dollar lost by a user. This gives Omni the ability to offer users a percentage of their trading losses back via rebates/loss rakebacks.
Immediate Liquidity: The second a new asset is listed on Omni, OLP's market making engine begins offering quotes on it. This avoids the common problem of new listings being illiquid until orderbooks fill out.
No External Listing Dependencies: Because Omni has vertically integrated its market making processes, it can support the listing of a variety of exotic and long-tail underlyings that require close coordination between the platform and market makers. Some examples of such markets include volatility indices, interest rate swaps, and in-game items. All OLP requires for a new listing is a reliable price feed, a quoting strategy, and a hedging mechanism — all of which can be built and maintained in-house.
A common question we receive is "if OLP is the only market maker allowed to quote on Omni, isn't it incentivized to widen spreads as much as possible?"
This question dives into OLP's incentive design, which has been optimized to align the development team, OLP depositors, and traders as much as possible.
Before digging into OLP's incentive alignment, it's important to understand how both OLP and the Variational protocol generate revenue.
OLP makes money through the following flow:
OLP constantly determines a fair spread for each asset.
Users open trades against OLP at the quoted prices.
OLP hedges out the directional exposure it accumulates from traders via external venues.
The key assumption to OLP's revenue model is that OLP can hedge its exposure for cheaper than the spread paid by the user. This can be due to OLP's ability to access lower fees than normal users on other exchanges (due to the volume it trades), or sophisticated hedging strategies that take advantage of correlations and betas.
The Variational protocol makes money by taking a volume-based percentage of OLP's revenue. To give a high-level example, the Variational protcol may earn 1% of OLP's daily revenue if Omni is processing greater than $X million in volume per day, or 2% of OLP's daily revenue if Omni is processing greater than $Y million in volume per day, etc.
To answer this question, it's simplest to go through each user group and identify their incentives.
Development Team: The Variational team is incentivized to maximize volume, which maximizes the percentage of OLP's revenue that the protocol captures. Offering spreads that are better than existing platforms is one of the most straightforward ways to increase volume.
OLP Depositors: OLP depositors are incentivized to increase OLP's revenue. The volume-based percentage of OLP's revenue that is captured by the Variational protcol has been carefully designed to ensure that it is always strictly better for OLP's revenue (even after subtracting the Variational protocol's cut) for volume to increase. Since OLP depositors have no control over the spread, their most effective path to increasing vault yield is by bringing more volume to Omni.
Traders: Traders are universally incentivized to perform their trading wherever it is cheapest. While extra factors like switching costs and UI familiarity are always considered in the decision of where to trade, being a strictly cheaper place to execute trades is highly attractive to high-volume traders.
OLP shares many similarities with the vaults of other platforms, such as the Hyperliquid Liquidity Provider (HLP) and the Jupiter Liquidity Provider (JLP). However, there are some key differences worth highlighting.
HLP does run a sophisticated market making strategy, but is not the only counterparty to user trades on Hyperliquid. JLP is the only counterparty to user trades on Jupiter Perps, but it runs a simple AMM strategy rather than a complex proprietary strategy.
OLP is the first vault that simultaneously runs a highly sophisticated market making strategy and is the only counterparty to user trades. We view this combination of features as the next evolution of market making vaults in DeFi.
Initially, the Variational team has provided seed capital for OLP. Once the system's stability is proven over time in mainnet and has a good track record of generating market-neutral yield, we intend to open it up to user deposits via a community vault.
Like any market making algorithm, there is a risk that OLP loses money. Users should carefully understand the risks of OLP and the protections that the Variational protocol provides in terms of risk checks and locked collateral/liquidation rules.
