> For the complete documentation index, see [llms.txt](https://docs.jaawle.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.jaawle.xyz/risk/liquidity-providers.md). # Risks for liquidity providers An LP token is a claim on a pool's net asset value. The pool earns fees, borrow, funding and dividends, and it is the counterparty to every trade in its market. This page lists what can reduce NAV. ## Traders winning The pool pays traders' gains. Over time fees and carry exceed what a balanced flow of traders wins, but in any given period the pool can lose to a crowded, correct side. The worst case for a stock pool is a sharp fall in the stock while traders are net short: the pool's inventory loses value and it owes the shorts. Funding leans against this by charging the heavy side, and open interest on each side is capped by what the pool can back. ## The stock itself A stock pool holds about 60 % of its value in the market's shares. Between rebalances, the LP token moves with the stock. Depositing into a stock pool is, in part, a long position in that stock. ## Bad debt A trader liquidated after a gap can owe more than the collateral. The insurance vault, funded by a share of every fee and by liquidation penalties, covers the shortfall up to per-transaction and per-day caps. Beyond the caps the loss is the pool's and is recorded as bad debt. ## Liquidity and queues Deposits and withdrawals are requests executed by the keeper at NAV. USDC withdrawals from a stock pool are paid from the pool's free USDC; larger ones queue while the keeper sells shares, which only happens in the session. Withdrawals in shares are immediate. Nothing executes at a closing mark. A request placed while the exchange is closed waits for the first live print, which protects existing LPs from someone depositing or redeeming against Friday's price with Monday's information. ## Fees paid Every mint and burn pays 0 to 80 bps depending on whether it moves the pool toward or away from its target weight. The fee is paid to the pool, so it is a cost to the mover and income to the other LPs. ## Issuer and custody The pool's shares are tokenized shares held by the pool contract. Their value depends on the issuer honouring them. An order in flight with the issuer is escrowed and counted in NAV; if it never completes, the escrow is refunded after a time limit. See [Tokenized shares and custody](/assets-and-prices/tokenized-shares-and-custody.md). ## Contracts The pool is a smart contract behind an upgradeable beacon controlled by a timelock. Upgrades are visible before they apply. The contracts have not been audited yet; see [Security](/security/design.md). --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter, and the optional `goal` query parameter: ``` GET https://docs.jaawle.xyz/risk/liquidity-providers.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.