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Aqua introduces an innovative solution that empowers market makers to offer pricing capabilities without the burden of managing inventory availability. This functionality allows market makers to facilitate leveraged trading, contingent upon maintaining robust credit.
By delegating price risk-taking from Liquidity Providers (LPs) to professional market participants, Aqua addresses the issue of "impermanent loss" for LPs. This setup allows LPs to stake capital on a per-asset basis, ensuring predictable passive income.
In essence, market makers can seamlessly borrow the 'buy token' (quote token) to facilitate user swaps as short positions, while returning the 'sell token' (base token) from users to Aqua as long positions. Closing positions entails market makers settling all short positions and taking all long positions.
It's essential to note that while market makers "borrow" assets for swaps, assets from the other leg of the swap are directly received by Aqua. Position balances are recorded in the smart contract with every swap, preventing market makers from absconding with borrowed assets.
On the other hand , liquidity providers can utilise Aqua akin to a lending protocol like Compound. They can supply liquidity and use it as collateral to borrow from the pool. The distinction lies in market makers utilising supplied liquidity for their trading activities, incurring associated costs.. Consequently, capital efficiency and yield for liquidity providers are significantly enhanced.
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