Limitless is both an AMM a protocol that enables leverage trading and borrowing without the risk of liquidation, permissionless, and without relying on an oracle. Whether you are a trader, borrower, liquidity provider, or simply curious, let's dive together into the discovery of this protocol.

The protocol operates with three main participants: liquidity providers, borrowers, and traders.

Limitless aims to limit impermanent loss (IL) and provide better returns for liquidity providers.

Built on the architecture of Uniswap v3, when providing liquidity, you have access to ticks, ranges, etc., all within a permissionless environment. The added benefit is that when your liquidity is not being utilized, it is lent out to traders and borrowers in exchange for premiums.

Liquidity providers generate revenue through spot trading fees and premiums.

They can choose to provide liquidity on only one side of the price, closer or further away from the current price, in order to earn only premiums.

LP holders of Univ3 or cTokens/aTokens can also deposit their positions into the protocol to generate additional income through the mentioned mechanisms.

However, please note that if the deposited capital is utilized and there is insufficient liquidity in the ticks where it was placed, you will need to wait for either traders/borrowers to close their positions or for other liquidity providers to add liquidity in order to withdraw your funds.

Traders will have the ability to open long and short positions on any pair with leverage of up to 2000x, and once again, without the risk of price-based liquidation.

As long as the trader regularly pays the premiums owed to the liquidity providers, their position will remain open, regardless of its state.

Limitless allows borrowers to take out loans on any asset provided by the liquidity providers.

This is done without the risk of liquidation and with a minimal collateralization ratio, thanks to the payment of premiums, which keeps the position open regardless of its state, as long as the premiums are paid.

Trading and borrowing share the same liquidity pool and are priced in the same way.

In normal circumstances, when a trader or borrower opens a position, they provide collateral as a guarantee. As the price moves against them, there comes a point where the collateral is no longer sufficient to cover potential losses and prevent the protocol or liquidity providers from incurring bad debt or losses. This leads to the liquidation of the position, resulting in its forced closure.

This necessity of resorting to liquidations is common in various protocols, as explained in this article.

However, in the case of Limitless, the need for liquidations disappears. Let me explain.

When a trader or borrower opens a position on Limitless, they make a deposit and borrow a variable amount of liquidity (based on the trader's leverage and the borrower's collateralization ratio) from the liquidity providers.

This borrowed liquidity is then removed from the ticks where it was originally located.

Next, the borrowed liquidity is added to the trader's deposit and exchanged for the desired token based on the nature of the position (long or short).

For example, in the ETH/USDC pair:

The result of adding and swapping the borrowed liquidity with the trader's deposit is then locked until the position is closed.

Similarly, in a simple borrow, the collateral provided by the borrower is locked until the position is closed.

If the trader closes their position with a profit, the locked amount is sold, and the liquidity providers recover exactly what they lent, while the trader recovers his deposit and the profits.

The LPs have been compensated throughout the lifespan of the position through premiums, so they have no missed opportunity.

In a traditional AMM, they would have:

In the case where the trader closes their position with a partial loss, the locked amount is sold.

The liquidity providers once again recover what they lent, while the traders recover the remaining amount.

As in the first case, the liquidity providers have earned premiums throughout the lifespan of the position.

The most important case is when traders close their positions with a total loss.

This occurs when, at the time of closing the position, the price is equal to or lower than the "strike price" or "liquidation price" on a traditional trading platform.

This is the price level at which the value of the position is equal to or lower than the initial value of what the liquidity providers lent.

As a reminder, as long as the trader pays their premiums within the allocated time window, their position remains open, regardless of how far the price is below the strike price.

The closure with a loss will only occur if the trader decides to do so or if they stop paying their premiums.

In this case, the locked amount remains in the currency it is in and is only distributed to the liquidity providers.

You rightly point out that LPs incur losses at that specific moment. However, there are several scenarios to consider:

This also applies to loans closed without repayment from the borrower:

The second situation is indeed the least likely in all cases because the premium, which we will discuss later, varies based on factors such as the position status, demand, liquidity in ticks, leverage, etc.

Therefore, it is unlikely that a tick far away from the price would be selected, as if it were used, high returns would be available, and opportunists would certainly take advantage by replenishing the ticks closest to the price.

Regarding non-liquidations based on price, you now understand that liquidity providers are willing to buy the asset at the strike price (e.g., ETH at $900), allowing you to keep your position open in exchange for premiums.

In most cases, their positions, at the same price level, would have ended up with the same quantity of the same asset. The difference is that they are compensated (through premiums) for doing so.

We can thus conclude that in case 1, the traders' loss is "absorbed" by the LPs' impermanent loss, while in case 2, the loss is borne by the LPs, who are ultimately similar to option sellers.

I have been talking about premiums throughout this article, and here we are finally diving into it.

The premium is an amount that the trader/borrower must pay recurrently to the liquidity providers in order to open and maintain an open position.

It is the main source of revenue for liquidity providers when their liquidity is lent out (trading/lending) and thus locked. It also helps mitigate impermanent loss.

At the opening of their position, the trader/borrower can choose the frequency at which they want to make the payments, which can range from 24 to 192 hours. They must make an initial payment at the time of position opening, and if they miss a payment, their position will be automatically closed. However, if the position has a sufficiently high margin, the premium can be deducted directly from it, but the leverage will increase accordingly.

A position can be closed before the end of the payment period. In this case, a portion of the premium will be refunded proportionally to the time elapsed since the last payment.

For example: You opened a position by paying a premium of $100, and you have to make a new payment within 24 hours to keep your position open. However, you decide to close the position after one hour. You have used 1/24 of the premium. The remaining 23/24 ($95.83) will be refunded to you.

In general, when you provide liquidity, you are rewarded based on the volume of transactions through trading fees.

However, volatility is not compensated, and in the case of Limitless, the factor of illiquidity also needs to be considered.

Thus, the premium seeks to address these three aspects by being a weighted sum of the following inputs: illiquidity, volatility, and volume.

It will be proportional to the volatility of the pair, the trader's leverage, their financial deficit, the difference between the asset price and the strike price, and the market demand.

Illiquidity is related to the supply and demand for a given range of ticks. It is calculated using the utilization rate, so the higher the utilization rate, the higher the premium, and vice versa.

During the protocol's modeling, the designers drew inspiration from options. They included a model based on the Black-Scholes model in their calculations.

This allows them to take into account the inherent volatility of the pair, the trader's leverage, their financial deficit, the chosen payment frequency, and the strike price.

For example, in a long position, the premium price would increase significantly if the price goes below the strike price.

Lastly, when calculating the premium, the "expected trading fees" that a liquidity provider would have accumulated if their liquidity had not been lent out are also taken into account.

$LIMIT is the token of Limitless. It will be launched on Arbitrum with a supply of 100 million tokens.

$LIMIT can be converted into veLIMIT.

By holding veLIMIT, you enjoy several benefits:

Once converted into veLIMIT, you can return to $LIMIT through a vesting system that spans from 2 weeks to 3 months. The longer you vest, the more $LIMIT you will receive, and vice versa. If you don't vest 100% of the time, the $LIMIT that you don't receive will be burned.

oLIMIT are American-style options that will serve as incentives. A specific amount, dependent on the market, will be distributed at each epoch.

They can be converted into veLIMIT or $LIMIT in exchange for ETH. The discount will be dynamic to encourage conversion into veLIMIT.

I am aware that the Alpha Report is quite dense & lengthy, and I acknowledge that I may have overlooked certain mechanisms and details. However, I believe that the most important information has been provided here.

The main risk I see for the protocol (excluding smart contracts) is liquidity. Locking up liquidity amounts of up to 2000x the margin size for traders could be challenging to compensate.

Although mechanisms are in place to address this issue on paper, I am curious to see how it will translate once the protocol is launched.

Staying on the topic of liquidity, it is also important for liquidity providers using this protocol to understand that they will have less flexibility and may become locked in. The risks of losses are also higher, but theoretically, participants should be aware of this.

The protocol aims to be an all-in-one solution, and that may be its flaw. A comprehensive synergy has been designed, but can Limitless surpass competitors that focus on a single domain?

Whether it's in terms of fees, liquidity, user experience, security, and many others.

However, it is important to note that if the value proposition is fulfilled, it would open up many possibilities, including significant leverage without liquidations, non-liquidating loans, trading and borrowing on exotic pairs. In summary, it would offer numerous opportunities.

Article posted @July 17, 2023