📊Risk Management

Enhancing LP scalability via battle-tested risk management.

Vault Buffer Ratio - Maintaining Sustainability

As we've mentioned in the Avantis LP Vault section, investing in the vault is not risk free. The LPs are essentially taking a bet that even if traders make profits, the trading fees should at least protect the LPs principal.

Note: the profit / loss share of Avantis LP vault will be programmable via governance in the future, and we will monitor data post initial launch to observe LP and trader behavior.

Vault buffer ratio & Dynamic Withdraw Fees

In volatile market conditions, there are times where LPs do not have enough of a buffer to sustain any potential impacts from a traders' open PnL. The vault buffer ratio tracks how much buffer the vaults have to sustain any negative impacts from a traders PnL. Vault buffer ratio of 100% indicates that LPs currently have zero buffer against open PnL (i.e a traders' profits that haven't been realized). Similarly, vault buffer of 110% indicates that a trader can draw down 10% of the vault's value, before an existing LP starts losing their principal (note - this is an oversimplification, and does not apply to all LPs equally as LPs enter and leave the protocol at different times)

To avoid panic and maintain a healthy experience for traders, a vault buffer fee is taken to manage risk for LPs and traders, and preventing over utilization, which can be risky for LPs. In the long run, this maintains healthy liquidity, which brings confidence for traders, and ultimately generates more fees with less risk for LPs.

$$Vault\ Buffer \ Ratio = \frac{Current\ \ TVL\ +\ Vault \ \ Buffer -Open\ \ PnL \ }{Current\ \ TVL}$$

Where:

A. Open PnL = The net Profit / loss from open trades on any given day. These are trades that have not been closed, hence Open PNL is not yet realized.

B. Current TVL = The TVL in the vaults at the time of calculating the ratio

C. Vault Buffer = The difference between the Vault manager (the contract that holds all open collateral and undistributed PnL) - Open Collateral in the system (collateral sitting in currently open trades). Vault buffer shows how much excess capital is sitting in the LP pools to absorb PnL shocks during market volatility.

Note: Vault buffer ratio is a daily snapshot, and fees are only charged on withdrawal when buffer ratio is low. Other times, it is completely free to withdraw. The fees are also tiered based on the buffer ratio of the vault as shown below

Vault Buffer Ratio	Fee
<0.90	2.50%
[0.90, 0.95)	1.50%
[0.95, 1.00)	0.50%
[1.00, 1.05)	0.25%
[1.05, 1.10)	0.10%
>= 1.10	0.00%