Liquidity

Anyone can become a liquidity provider in Exponent yield markets, earning trading fees alongside exposure to both fixed and variable yields until a market’s maturity.

Liquidity providers can simply provide the underlying asset of a yield market (e.g. JitoSOL) and earn extra yield on it, while Exponent’s Liquidity Vaults acquire the assets required for the AMM pool.

​

Yield Market AMM Pool Composition and Mechanics

Since Exponent yield assets have an intrinsic time factor in their value and don’t behave like traditional volatile crypto assets (e.g. SOL) as they mature, providing liquidity for them in a classic AMM would encounter many inefficiencies such as significant impermanent loss at maturity.

Exponent has built a Time-Dynamic AMM inspired by Pendle’s AMM design, which is optimized for assets with maturities and dynamically concentrate liquidity as they approach maturity for optimal price execution.

Beyond powering Exponent yield markets, Liquidity Vaults can also serve as issuance points for yield market assets, using the liquidity from providers to mint PT and YT tokens and compose the AMM pools.

​

How does supplying liquidity into Exponent AMM work

To offer an optimal experience for both traders and liquidity providers, Exponent’s AMM pools have been designed with:

To achieve this, an Exponent yield market AMM pool is paired with the market’s underlying (e.g. JitoSOL) and its fixed-term asset (e.g. PT-JitoSOL, minted from JitoSOL).

Both tokens grow in value over time while their price divergence remains relatively stable prior to maturity due to their shared underlying asset and high price correlation. This design helps liquidity providers avoid significant impermanent loss from price divergence.

Additionally, to ensure optimal liquidity concentration of the assets in the pool, Exponent’s AMM features a time-dynamic liquidity curve, which:

• concentrate liquidity around the expected yield range of a specific market as assets approach maturity,

• and account for yield accrued over time.

This approach offers passive liquidity provision, sparing providers from manually adjusting their positions and enhancing capital efficiency for yield trading to capture the most fees — since the AMM’s time-sensitive component handles this.

​

Which Mode to Use When Providing Liquidity

Because Exponent is the main issuer for its yield markets—unlike other AMMs where acquiring tokens is the only way to supply liquidity—liquidity providers on Exponent can also mint them to offset any price impact.

Consequently, there are two ways to supply liquidity:

When to use Swap & Supply

• If you want exposure to only one position (LP tokens) and want to avoid managing YT.

• If you expect the current underlying APY to slightly underperform.

When to use Mint & Supply

• If you want to retain higher underlying yield and points exposure through YT minted and are neutral on the underlying APY.

• If you plan to withdraw before maturity, PT and YT minted can be recombined for the underlying asset at no cost.

​

Managing your Exponent liquidity positions

Once liquidity deployed, users can go under “My Position” tab to see their current liquidity position and its PnL. From there, the pool can be monitored:

• See crucial information such as maturity date, your deposit amount, total APY, pending yield (if any), yield earned;

• Manage the pool: Add/Withdraw liquidity, Claim yield from incentives (if any).

When withdrawing liquidity, users can select single asset mode to only use/receive the underlying asset of the pool. This swap the other token for the single asset selected, simplifying the UX for liquidity providers. For no price impact, liquidity providers can withdraw both tokens of the pool (at the exact balance currently deposited) and then deal with them.

​

Withdrawing Liquidity Before Maturity

When supplying liquidity in Mint & Supply mode, liquidity providers receive YT (e.g. YT-JitoSOL) minted from their supplied liquidity, while Income Tokens (e.g. PT-JitoSOL) minted are deposited into the liquidity vault for market making.

If there is enough liquidity for this market, Liquidity Providers can withdraw the entire position into the underlying asset by using the single asset withdrawal mode. Income Tokens part of the position will be swapped for the underlying and will incur slippage and AMM fees. At maturity, Income Tokens can be redeemed at no cost.

When liquidity is low for a market and a liquidity provider wants to redeem their Income Tokens before maturity, they can go to the Burn tab to burn them with the YT received when supplying liquidity, and get back the assets deposited into the underlying protocol. Note that, due to the AMM pool balance, a liquidity provider withdrawing liquidity before maturity might receive more Income Tokens than initially minted and be left with some surplus after burning them for the underlying asset.

​

Risks of Providing Liquidity in Exponent Liquidity Vaults

While Exponent Liquidity Vaults do not require much active management, there are some risks involved beyond smart contracts risks:

• Underlying protocols: The assets in the pool (Underlying and Income Tokens) are derivatives of positions held in underlying protocols (e.g. marginfi, Kamino). Their value is directly impacted by these protocols. A hack or exploit in an underlying protocol could severely affect liquidity providers and result in losses.

• Liquidity/Duration Risk: If a significant liquidity provider is the main liquidity contributor to an Exponent market, some of their liquidity in Income Tokens might temporarily be unsellable, making withdrawals before maturity more challenging due to low liquidity. In case there is not enough liquidity to sell Income Tokens, Liquidity Providers can redeem their position manually and receive Income Tokens in their wallet. From there, they can be kept until maturity, sold on the open market, or burn (using YT) to redeem their underlying.

• Price divergence (before maturity): While price divergence is offset at maturity, trading of Income Tokens before maturity causes their price to fluctuate, potentially leading to temporary impermanent loss for liquidity providers. Over time, this price divergence decreases and nearly disappears as Income Tokens approach price parity with the underlying asset they are derived from. Liquidity providers can always wait until maturity for price divergence to offset; impermanent loss is only realized if a liquidity provider withdraws and sells their position before maturity, if price divergence is high.

​

How it works

In order to provide liquidity for the first time, liquidity providers need to acquire the assets required for the pool, which is composed of the underlying (e.g. JitoSOL) and its fixed-term asset (e.g. PT-JitoSOL). Liquidity providers can either buy the assets on the market (which can incur additional costs), or mint the assets required, which are then added to the pool to provide liquidity for the market.

The liquidity deposited in a Liquidity Vault is then used for all trades on Exponent of this market, fixed and variable yields.

​

Reducing Price Divergence

For capital efficiency and because Exponent’s AMM dynamically concentrates the liquidity as Income Tokens approach maturities, each AMM pool features Income Tokens paired with their underlying asset. With AMMs that use predefined formulas to allocate capital across a continuous spectrum of prices, pairing assets with others that are correlated by price is more efficient.

When the paired assets’ prices are strongly correlated, the price curve can be tighter, significantly reducing price divergence and, consequently, impermanent loss.

For example, an Income Token based on ‘marginfi SOL’ would be paired with marginfi SOL (SOL lent on marginfi). This pairing is further justified by the fact that yield from lent SOL is paid in SOL, making the yield component for Exponent’s derivative naturally expressed in SOL.

​

Dealing with Time-dependent Impermanent Loss

But price divergence alone isn’t enough — another important factor is the time dependencies of the assets in the pool, which can impact the capital value of liquidity providers’ funds as well as cause inefficient slippage and price impact for traders. To prevent these inefficiencies when trading Exponent yield markets and to better manage impermanent loss, Exponent’s AMM incorporates two unique mechanisms:

• Time-Sensitive dynamic curve for liquidity: This time-based component accounts for the fact that volatility decreases as Income Tokens and Yield Tokens approach maturity to dynamically adjust the liquidity concentration in the pool. The AMM gradually anticipates less trade volatility over time. Early in the maturity period, the AMM curve is at its most sensitive to trades since significant yield is still available, whereas by maturity, trades have zero price impact as yield no longer being distributed to Yield Tokens and Income Tokens’ price converges to 1:1 with the underlying.

• Flash Swap for trading Yield Tokens: Given that Exponent’s assets have a maturity date and Yield Tokens (YTs) prices trend toward zero over time, the AMM does not require active liquidity for YTs. Instead, it leverages the price relationship between Income Tokens and Yield Tokens (both derived from the same assets) and uses a mint/burn function to generate the exact amount needed for each trade, a process called Flash Swap. This approach enables liquidity providers to earn fees from both volatile and fixed yield trades within a single liquidity position, effectively doubling the yield from trading fees.

For more details on the mechanisms behind Exponent’s Time-Dynamic AMM, refer to the Protocol Mechanisms section.