HMX <> Abracadabra integration: Adding an HLP Cauldron

đź’ˇIdea Discussions
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Introduction

HMX is a next-gen decentralized perpetual protocol with a cross-margin and multi-asset collateral support on Arbitrum. Since its inception, HMX has solidified itself as one of the leading PerpDEXs on the Arbitrum ecosystem. With 10Bn+ in trading volume, HMX currently supports 30+ markets across crypto, FX, and commodities.

HLP is a pool which acts as a market making liquidity for traders on HMX, which currently has ~$27Mn in TVL. Adding HLP as collateral on Abracadabra would empower users to capitalize on the attractive yields generated by HLP - one of the highest in the market.

Some of the HMX’s platform statistics are listed below:

  • ~$10Bn+ in total trading volume
  • ~$90Mn in Daily trading volume
  • ~$31Mn in TVL
  • ~5,000 unique users
  • 130,000+ trades supported
  • 9,000+ community members across Discord & TG
  • 3 audit reports from Foobar, WatchPug, and Cantina
  • $4.3M+ of revenue distributed to users.

For more statistics, please visit our Dune Dashboard.

Links to our official channels are listed below

Risks Assessments

HLP pool works in a similar way as the GMX’s GLP and GM pools. It has many safety mechanics in place to ensure the price stability and mitigate potential outsized loss from any individual trades. We highlight the key protection mechanisms here:

  1. Max Utilization limit

HMX reserves the liquidity in HLP to be paid as profits to traders. There is a max utilization for HLP, beyond which new positions are not allowed to be opened (traders are still allowed to reduce their OIs). This parameter is in place to ensure some liquidity is always available for LPs to withdraw.

  1. Auto Deleverage (ADL)

Each individual trading position will have an in-profit price target where a position will be automatically closed for users. This guardrail is put in place to limit the downside to the LPs. The ADL price is market-specific and is a function of initial margin requirement. It is set at a level that balances between the risk for LPs vs. the attractiveness for traders.

  1. Profit Reserve Buffer

HMX keeps track of the net global PnL of all traders against the HLP pool. Once the net global PnL hits a percentage threshold relative to the HLP’s TVL, the protocol will start to auto deleverage open positions, starting from the most in-profit positions, to de-risk the overall platforms and LPs. The Profit reserve buffer is calculated using the formula below:

ProfitReserveBuffer = 1 + NetGlobalPnL / (HLP’s TVL)

  1. Open Interest Limit

Each market will have its own open interest limit, which can be set separately for the short side and the long side. The Open Interest Limit defines the maximum ongoing open interest that each asset can have on each side, beyond which new open interest is not allowed.

  1. Velocity-based Funding Rate:

The Funding Rate is charged on the traders’ position, similar to the borrowing rate. The Funding Rate helps bring a balance between long and short OI on HMX, thus ensuring our LPs are not too exposed to one side of the market. HMX utilizes a velocity-based funding rate model. Instead of the typical model where the long-short skew determines the funding rate, our model has the skew determines the velocity of the funding rate.

  1. Adaptive Pricing Mechanism

HMX employs a mechanism called “Adaptive Pricing” as another way to incentivize / penalize traders to help bring balance between the long and short open interest of each trading asset. When a user opens or closes a trading position, the Adaptive Pricing mechanism applies a premium or a discount on top of the oracle price based on the resulting skew after the transaction is executed between the long and short open interest of the asset.

  1. Adaptive Trading Fees

The adaptive trading fee is charged as a percentage of the trader’s position size on top of the trading fee. This mechanic takes our security to the next level to prevent large trades relative to the liquidity level and price manipulation . It also improves user experience at the same time as it enables us to:

  • List more crypto markets including ones with lower market cap
  • Increase Max. Trade Size

We would like to highlight that the short / long OI on HMX has been very balanced over the last 5-6 months.

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The HLP share price has also been consistently going up, with small drawdowns.

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Security audits

HMX has been audited three times by leading auditors, including

  • Cantina: Backed by Spearbit, one of the leading web3 security auditor
  • 0xFoobar: Leading independent security auditor (@0xFoobar)
  • WatchPug: Specialized Web3 auditor

Audit reports can be found here.

Cauldron Parameters

HLP’s target compositions are made up of:

  • 50% GMBTC
  • 40% GMETH
  • 10% USDC

Given its composition and the mechanics of how it operates, we believe that the cauldron’s parameters for HLP can be on-par with those of GMs’ Cauldron from SAIP#34.

  • 85% LTV
  • 5% Interest
  • 1.5 Borrow Fee
  • 6% Liquidation Fee

Profitability

HLP’s APY has been consistently higher than 50% over the past months, making it one of the most attractive yield bearing tokens in the Arbitrum ecosystem. The HLP market will feature competitive interest rates, aligning with the diverse risks associated with the collateral and its impact on the overall system.

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